Stocks endured their worst January since 2009, with the S&P 500 falling 5%. Concerns surrounding the world’s two largest economies, the U.S. and China, spurred the declines. Investors worried about the Federal Reserve raising interest rates at the same time as the Chinese economy slows.
The S&P 500 had fallen as much as 9% through mid-January before two unexpected overseas policy announcements cheered markets. First, the European Central Bank said itwill consider more stimulus this year, potentially adding to its existing $1.4 trillion money printing program. Japan then announced it would lower short-term interest rates to below zero.
What does this mean for investors? 1) Policy makers can enact further stimulus. Low inflation globally means new measures can put in place without concern for runaway inflation. The market environment would be more worrisome if central banks had to fight rising inflation by raising rates aggressively. 2) In a global marketplace, low interest rates overseas should limit the extent to which interest rates will rise in the U.S. (chart) 3) Dividend-paying stocks appear to be attractive as reality sets in that interest rates may stay low. We expect investors worldwide to turn increasingly to stocks to generate income.