Central banks still hold the keys

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By Russ Koesterich, BlackRock’s Global Chief Investment Strategist

Appeases markets

US markets, both stocks and bonds, were cheered last week by soothing comments from the Federal Reserve (Fed). In all, the Dow Jones Industrial Average added 0.65% to close the week at 18,016, the S&P 500 Index advanced 0.76% to 2,110 and the tech-heavy Nasdaq Composite Index rose 1.30% to 5,117. Meanwhile, the yield on the 10-year Treasury fell from 2.40% to 2.26%, as its price correspondingly rose.

Price action in other markets reflected a similar phenomenon. Indeed, just as the Fed’s words brought solace in the US, still accommodative central banks in Europe and around the world are helping to keep markets buoyant. For investors, the key takeaway is that we’re still in a world where market swings, both positive and negative, are being disproportionately driven by central banks.

Volatile week ends on the upside

While US stocks managed to eke out modest gains last week, it wasn’t without some violent swings along the way. The gyrations could be partly attributed to mixed economic data. Most recently, industrial production came in well below estimates.

But investors were encouraged by the Fed’s comments on Wednesday. The central bankers’ statement raised the assessment of both the broader economy and the labor market, and confirmed expectations for a rate hike later this year. However, investors were relieved that the Fed’s forecasts suggest a shallower path of rate hikes next year and in 2017.

With fears over the Fed calmed, bonds rallied. Both long- and short-term rates retreated, sending the yield on the 10-year Treasury roughly 20 basis points (0.20%) below its June 10 peak. The moderation in rates allowed for a rebound in stocks, a trend supported by increasing flows into equity funds.

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