Janet Yellen’s testimony to the U.S. Congress

In today’s episode of Market Week in Review, Rob Cittadini, regional director, consultant relations, chatted with Mark Eibel, director, client investment strategies, on U.S. Federal Reserve Chair Janet Yellen’s comments to the U.S. Congress earlier this week.

According to Eibel, Yellen’s remarks are best understood if we take a step back and assess things from a global perspective. We are entering a world, he notes, where interest rates are starting to increase across the board. In the view of Eibel and other Russell Investments strategists, this is good news. Why? Because central banks raise interest rates when economies start doing better, in order to get a jump on inflation.

Eibel points out that as it’s been roughly 10 years since the Great Recession, there are now many individuals unaccustomed to trading in an economy with rising interest rates. Because of this, he anticipates that every remark, announcement or action taken by the Fed or other central banks will be scrutinized on a daily basis going forward. However, Eibel noted that the markets did react favorably to Yellen’s overall message of taking things slow and beginning a gradual wind-down of the Fed’s balance sheet.

In short, Eibel said, “we shouldn’t be scared of rising interest rates in the U.S. or abroad.” He believes that while this may result in a little more chop and volatility in bond and equity markets, overall, it’s a good thing—as it means the global economy is doing well.

Healthcare and tax reform in the U.S.—Will anything get done?

Shifting to the talks this week in the U.S. Congress around healthcare and tax reform, Eibel acknowledged the mounting frustrations of some regarding Congress’ inability to move forward on any big legislation. He noted the tremendous challenges in undertaking both healthcare and tax reform simultaneously.

As the year progresses, Eibel expects that markets will start to hone in more on what the U.S. government is doing in regards to both, focusing less on actions taken by central banks. “The handoff from monetary policy to fiscal policy in the U.S. is underway,” he stated. The ultimate question for markets, according to Eibel, is whether Congress will actually deliver on healthcare and tax reform—and if so, what the reaction will be, especially if either piece of legislation is not as large in scope as originally promised.

Strong market performance abroad

Transitioning to international and emerging markets, Eibel referenced the strong performance in both. In his and other Russell Investments strategists minds, this is likely to continue. “From a fundamental standpoint, the growth in emerging markets and Europe is picking up, and from a valuation standpoint, both are still cheaper than the U.S.,” he said. “This is true even though central banks in these areas are raising interest rates, as they are starting at a base of essentially zero.”

In addition, Eibel pointed out that political instability in the U.S. now appears greater than in Europe and elsewhere, which is a change in his thinking from a year ago. In the minds of Eibel and other Russell Investments strategists, this means that investors should likely maintain a globally diversified portfolio.