For the first time since June of 2006, the U.S. Federal Reserve (the “Fed”) voted to raise the target range for the Federal Funds Rate from 0.00% – 0.25% to 0.25% – 0.50%. The decision on December 16th was unanimous by all Fed officials, and marked the end of a 7-year period of “zero-interest rate policy.” During the quarter, the U.S. Dollar continued to strengthen against a basket of other major currencies, largely due to the widely expected decision by the Fed.
In anticipation of the Fed’s decision to raise the target rate, the U.S. Treasury yield curve steepened and resulted in a -0.6% loss for the bond market, measured by Barclays Aggregate Bond Index. Nearly every domestic fixed income sector was negative for the quarter, with high yield as the worst performer at -2.1%. High yield bonds continued to be punished by investors, particularly in the energy and materials sectors. Emerging market debt was the best performing fixed income sector for the quarter, which was driven by investor optimism that fears of a global economic slowdown were incorrect.
All major U.S. equity asset classes were higher for the quarter with “growth” outperforming “value” across large-capitalization, mid-capitalization, and small-capitalization indices. Growth sectors, including technology and healthcare, led the markets higher while utilities and energy sectors underperformed. Suppressed energy prices continued to weigh on producers, specifically in the oil industry. The utility sector underperformed due to their inverse relationship to treasury yields which rose for the quarter.
The global equity markets rallied, with Japan leading the way. During the quarter, the Bank of Japan decided to maintain its annual asset purchases at approximately 80 trillion yen. A weaker yen contributed to strong performance of export companies particularly in the automaker industry. Pacific ex. Japan was the next best performing global index led by Indonesian equities which ended the quarter up 20% due to fiscal policy reforms. Broadly, strong merger and acquisition activity contributed to the global stock advance.
The domestic economy continued to demonstrate relative strength. Unemployment fell to 5.0% with more than 250,000 estimated jobs added to the economy in October, November, and December. A stronger U.S. Dollar continued to put pressure on export companies. Cyclical economic indicators, however, continue to reflect growing strength in the economy including: light vehicle sales, housing starts, and real capital goods orders. Headline CPI moved slightly higher to 0.5% in December, but continued to remain relatively low due to suppressed oil prices. Low oil prices had a significant negative impact on producer companies, though the consumer benefited from lower gasoline prices.