Central banks were the focus of investors’ attention last week. The Federal Reserve conformed with expectations, maintaining interest rates at their current level. In the accompanying press conference Fed Chairman Jerome Powell encouraged investors to expect three rate cuts this year in line with current market expectations (source CME Fedwatch).
End of an Era in Japan
In contrast, the Bank of Japan ended its eight-year policy of negative interest rates. This represents a significant policy shift and reflects the recent strength in the economy, higher inflation and wage settlements. Japanese equities have benefited from this growth with the Morningstar Japan index rising 47% over the last year. However, this return has been diluted for US investors by the sharp fall in the Japanese yen relative to the US dollar, providing a stark reminder that when investing overseas, we must take account of currency changes as well as the prospects for the companies in which we invest.
Equity Prices Continue to Rise
Despite a fall on Friday, US equity prices rose over the week with the Morningstar US Market Index finishing 2.31% higher and 9.65% higher for the year to date. A key contributor to this gain was Nvidia which rose 7.35% as investors reacted positively to its developer conference. You can read our Morningstar Equity Analyst take on the Nvidia announcements here.
Value Investing Takes Time
As US asset prices continue to rise above Morningstar analysts’ estimate of fair value, it is natural to look for alternatives that appear more attractively priced. However, it is important to remember that the reason some investments appear attractive is that they are behaving differently from those that are rising quickly.
While choosing more attractively priced assets can deliver higher returns – and often appears smart in hindsight – such assets are likely to remain uncorrelated in the near term and create considerable regret as assets one has sold continue to rise in price, while those that have been bought languish or fall further. Such disappointment can lead to poor decisions. It is therefore vital that investors seeking better value holdings have the patience to overcome this regret and understand that market trends do not turn simply because one has changed one’s mind.
Inflation and Fed in the Spotlight Again This Week
In a busy week of economic data, investors are likely to focus on Personal Consumption Expenditure (PCE) inflation data on Thursday. This is expected to show a slight fall in “core” PCE (which removes volatile food and energy prices) from 0.4% to 0.3%. Investors will also be listening for confirmatory remarks from the five Fed Governors and Presidents (including Jerome Powell) due to give speeches this week. Signs of growing concern about inflation would likely to have a negative impact on asset prices.
