Over the remainder of 2018, the U.S. stock market will likely be driven by developments surrounding trade policy and the pace of both corporate earnings and economic growth. However, the most pivotal developments for the investing environment could come from central banks.
Central banks around the world have become less accommodating in 2018, a trend that could be undercutting one of the primary factors that drove stocks higher for years.
According to data from Charles Schwab Corp.
the number of central banks raising interest rates is at its highest level since 2011. Meanwhile, the number cutting rates is at a 12-year low.
This trend is perhaps best embodied by the Federal Reserve, which is the most high-profile central bank raising rates and making other changes, including reducing the size of its balance sheet. The Fed has been steadily increasing rates, including at its June meeting, where the benchmark federal-funds rate was lifted to a range of 1.75% to 2%. Last week, Fed Chairman Jerome Powell said the U.S. central bank plans to keep raising rates every quarter, at least “for now.”
Low interest rates, along with the Fed’s bond-buying program, have been seen as one of the fundamental factors that have lifted stocks since the financial crisis. However, this era is coming to an end. Not only are rates rising at a steady clip, but the Fed’s balance sheet — which ballooned to around $4.5 trillion at one point — is being unwound at a pace $10 billion a month (the pace will eventually accelerate to $50 billion a month). The bond-buying program further pushed down interest rates, making stocks look more attractive than fixed income.
Changing Fed policies have likely already contributed to recent market action, including the yield on the 10-year Treasury note
moving up to 2.96% from 2.41% at the start of the year. That rise in yields means Treasury prices have been falling, as the two move inversely to each other.
Over the same period, the Dow Jones Industrial Average has risen 1.4%, the S&P 500 is up 5%, and the Nasdaq Composite Index is up 13.6%.
Source : MTV