What Stimulus Overseas could mean for U.S. Investors

Stocks advanced again last week, driven by an improving economic picture and an encouraging earnings season by U.S. companies. But a stronger economy comes with a flip side: less need for monetary stimulus.

Moreover, as I discuss in my new weekly commentary, major central banks are now diverging in their monetary policies, a dynamic we saw vividly on display last week with the Federal Reserve ending its quantitative easing (QE) program, while Japan expanded its version of QE.

As expected, the Fed completed its QE program last week, citing substantial improvement in its labor market outlook and strength in the overall economy, while it deemed low inflation readings transitory. This suggests that the Fed is still likely to begin raising rates next year, probably over the summer. The somewhat more hawkish tone from the Fed had the predictable impact of pushing the dollar higher and gold, which has fallen below $1,200/ounce, lower.

The recent strength in the dollar is not simply a function of a relatively strong U.S. economy, but the relative weakness evident in the rest of the world. With the economies in Japan and Europe struggling, their central banks are being forced to ease monetary policy at the same time the Fed needs to start contemplating raising U.S. rates.

Last week, the Bank of Japan (BoJ) unexpectedly expanded its own version of quantitative easing. This announcement came shortly after an inflation report showed that Japan’s CPI, excluding food and energy (and further adjusted to exclude the recent tax increase) has dipped to 1%, meaningfully below its target.

For now, we continue to expect a world in which U.S. growth overshadows that of other developed countries, resulting in a strong dollar and weaker commodity prices. However, this situation could in turn lead to extraordinary stimulus measures by other central banks which, in turn, could benefit their stock markets. Accordingly, we continue to favor Japanese stocks, which should enjoy the tailwind of aggressive monetary policy by BoJ, much as the U.S. has had from the Fed for the past several years.

Source: Bloomberg

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.

©2014 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.



© BlackRock

Read more commentaries by BlackRock