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Market Commentary

May 19, 2015

Scott L. Wren, Senior Global Equity Strategist

Weekly update on current stock market action

  • The S&P 500 continues to set record highs in an economy that is growing below trend. We continue to believe valuations are not stretched at current levels and the stock market is at or near “fair value” for this point in time.

What it may mean for investors

  • The Federal Reserve (Fed), while expected to adjust interest rates slightly higher later this year, will likely be moving at a slow pace in an effort to not disrupt the economy or financial markets.

Just Be Glad the Fed is Data-Dependent

Over the years, it frustrated this strategist to no end that the Fed constantly reminded the markets that most decisions, especially the important ones, were "data-dependent." Why wait until the usually lagging economic data tell us it is time to make a monetary policy move? By that time, my reasoning went, our central bank would probably already be well behind the curve and, as a result, need to scramble to catch up to where the economy had already gone.

Does the Fed not hire some of the best economic analytical minds in the country? Isn't the Fed spending time developing extensive statistical modelling techniques that can help predict what the most likely economic outcome is down the road? Or does the U.S. central bank just not trust the accuracy of its forward-looking analysis? After all, we are talking about the most powerful central bank on the planet. Shouldn't it have the best tools available and a high degree of confidence in those tools?

But if we look back over history, or even just the last 15-20 years, one can understand why being more proactive rather than reactive might not be the best strategy for the Fed to follow. The Fed has tended to leave interest rates too low for too long in the aftermath of economic downturns and too high for too long after the economy peaks. Of course, this inefficiency in the application of monetary policy results in the ebb-and-flow of the economic cycle. To be sure, fine tuning a $17 trillion economy is no easy task under any conditions.

In this current recovery, the Fed has appeared convinced at numerous points that economic growth was going to accelerate meaningfully. The last 18 months have not been an exception. But the Fed has been surprised at the slow forward progress in the underlying economy; it expected better growth than what has actually occurred. Like the expectations coming into 2014, as we moved into this year, a number of Fed officials believed the U.S. economy would grow in excess of three percent in 2015. Given the poor growth rate in the first quarter and the likely downward revision coming later this month, those predictions will probably be trimmed back a bit.

Had the Fed acted on its initial growth estimates over the last 18 months, we could have already seen increases in the Fed funds rate by now. But instead, we are expecting a small rate increase in September at the earliest given the economic realities. Our analysis suggests the Fed’s dependency on data will prevent it from doing much more than a token rate increase to get the ball rolling on the long road to rate normalization that lies ahead.

Right now the last thing we want to see is the Fed pushing interest rates steadily higher. If economic growth was going to accelerate to over three percent and consistently stay there, the story might be different. But if the Fed had acted proactively and adjusted monetary policy based on its initial growth estimates rather than the actual data, the S&P 500 would likely not be setting new record highs, at least in this strategist's opinion.

So on second thought, just be glad the Fed is data-dependent.

Scott WrenAbout Scott Wren

Scott Wren is a senior global equity strategist for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.

Mr. Wren produces strategy and guidance recommendations for global equities. With his knowledge of the financial markets, he is often quoted in national media outlets including Reuters, The Chicago Tribune, The Los Angeles Times, The Washington Post, The Associated Press, and The Wall Street Journal. He has appeared in interviews on CNBC, Bloomberg TV, Fox Business News, and Nightly Business Report. Prior to joining Wells Fargo Advisors predecessor A.G. Edwards in 1998, Mr. Wren worked as a senior foreign exchange dealer for The Boatmen’s National Bank of St. Louis. He began his career on the trading floor of the Chicago Mercantile Exchange and has more than 25 years of experience in financial services.

He received a Bachelor of Science in Business Administration from the University of Kansas and a Master of Finance from Saint Louis University. He is located in St. Louis, Missouri.

*As of Sept. 30, 2014


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