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Hi, you're watching Russell Market Week in Review for the week ending March 21, 2014.
We're coming to you today from Russell's world headquarters here in Seattle, WA. I'm Mark
Soupiset and I'm joined today by Doug Gordon, our Senior Investment Strategist for North
America. Doug, thanks for being with us. Glad to join you, Mark.
Let's go back to the beginning of The Week That Was, we had the Ukraine/Crimea referendum.
We talk a lot on this program about both the political and economic implications of these
geopolitical events. What should the markets be paying attention to, and what did we see
this week? Sure. It's almost déjà vu from the last
time we spoke where we had the original move into Ukraine, and now we had the referendum,
which I think to a large extent was already anticipated by the market. I think that the
vote outcome was somewhat a foregone conclusion. But I think it's a case where again -- while
we said last time -- some of those risks have mitigated, certainly the market has gotten
to a point where it does not have as great a concern around the geopolitical risk from
either a foreign policy action by the West or very punitive sanctions...I think this
was again priced in. That said, I think we'll still have to follow it, might be kind of
a lingering issue over time, but it's I think maybe something that's a short game/long game
story, where the short game on a foreign policy level, the Russian government and Putin have
certainly been successful, I think even this morning their legislature affirmed the annexation
of Crimea. But the long game is going to be very tough for the Russians insomuch that
this is going to have an impact on their primary sources of wealth coming into the economy
-- specifically energy and natural gas. So when we look at this, I think in the long
game, I think the West is possibly going to wait this out.
And certainly we will keep an eye on that as we go forward on this program. Let's shift
gears and come to the US for a moment. We had Janet Yellen's press conference this week,
we had the FOMC statement, and essentially what I took from that is that they're no longer
looking at unemployment as the single proxy for determining when they're going to raise
interest rates; give me your perspective on that.
Sure. This is exactly right. I think accurately, when we look in retrospect at the chairmanship
of Ben Bernanke versus the chairmanship now of Janet Yellen, we had two similar individuals
and they've reaffirmed that the policy actions will be similar; we have two with very different
academic backgrounds. Chairman Bernanke, certainly his academic background was in the Great Depression,
exactly perhaps what we needed in 2008/2009, whereas Chairman Yellen's academic background
and a lot of her papers are written on taking this montage of data and assessing what's
the value or the import out of that. And when we look at it now, moving away from the single
unemployment metric, which particularly insomuch as we're at 6.7% at present or very close
to that, to a montage of data, that I think is going to lead us to more likely alignment
of the move with the target Fed funds rate when the economy is able to sustain that.
How much of a shift was this really, though? Because externally there was this single data
point, but surely internally they weren't only looking at unemployment?
Exactly right. Exactly right. This was what they had proffered to the market and to the
public if you will as their point, which I think when we look at it now she got really
cornered on a question and perhaps taught a stark lesson in the parsing of her words
and the literal interpretation of her words, when we saw the market sell off, when she
was asked about how soon after the end of the asset purchase program they would potentially
consider a move in the target Fed funds rate. I think when you look at it though, the market's
figured out that that might have been a modest misinterpretation. When you time it out, remember
that the quantitative easing program was not a number divisible by 10 - $85 billion. So
once we get to the end, likely the October after the meetings, we still will have the
next month $10 billion taken away, and then the remainder of $5 billion. That can be lumped
in the previous month or moved into the subsequent month, six months off from that, which is
pretty close to the start of third quarter 2015, which is coincidentally where consensus
was prior to the meeting. Maybe moved up modestly a month or two, but not consistent with the
manner that we saw the move in equity markets and while the bond market moved, it has stayed
pretty much in that area, with the 10-year moving up to close to 2.75%-2.77%; it's still
not fully pricing in that earlier start to moving the target Fed funds rate.
Let me ask this as we wrap up, staying on macroeconomics. We talked the last time you
were on about the macroeconomic factors that we were looking at to validate last year's
equity returns. As you look forward over the next week/month -- what are you keeping your
eye on, and what should investors be looking at?
Sure. Again, a really good question, a pertinent question. I think the next non-farm payroll
number is going to be very, very important coming out two Fridays forward. We've had
the two-week numbers -- December and January -- we've had the stronger number, and now
do we affirm that and again validate the price levels that we've gotten to where inter-day
today I think we're pushing close to all-time highs on the S&P 500, Russell 1000, Russell
2000. Good stuff. Doug, as always we appreciate
your time and insights, thanks for being with us. And thank you for being with us on Russell
Market Week in Review.