Stocks Rally Following Janet Yellen’s Conference And Scotland’s Historic Referendum

September 23, 2014

Interest rates can’t stay zero forever, but for now it’s more of the same.

The Federal Reserve’s bond-buying program, enacted to spur growth, will indeed be winding down next month, as expected. But record-low interest rates will stay as they are for a “considerable time,” Fed Reserve Chairwoman Janet Yellen insisted during her Wednesday press conference last week.

It was “game on” for the stock market following Yellen’s speech. The Dow Jones Industrial Average closed at a new record high of 17,156, while the S&P 500 Index rose two points to close at 2,001, the Nasdaq nine points to end at 4,562.

This news gives stocks reason to rally for a “considerable time,” or at least until the Fed gives us a more concrete timeframe for a rate hike.


With interest rates very likely to rise sometime next year and at an indeterminate pace, you want to be diversified with short-term bonds, as they’re less volatile to rate changes. Our Near-Term Tax Free Fund (NEARX), which invests in such bonds, recently received the coveted five-star rating from Morningstar for the three-year performance period.

Last week in an interview with Marc Lichtenfield’s Oxford Club Radio, U.S. Global Investors Director of Research John Derrick highlighted some of the fundamentals of NEARX:

“Our average maturity’s around 2.75 years, so under three years right now… The overall fund structure is pretty conservative. [NEARX] really doesn’t move around that much. It’s a steady grinder.”

Rolling with the Punches

Chairwoman Yellen stated that the decision to raise rates was “highly conditional” and dependent on the Federal Open Market Committee’s (FOMC) assessment of the economy, which appears right now to be showing moderate or, in some sectors such as housing, faltering growth. Inflation has also fallen short of expectations.

But as always, we see opportunity.

The producer price index (PPI) numbers, released last Monday by the U.S. Bureau of Labor Statistics (BLS), reveal that demand goods such as gasoline and food dropped 0.3 percent while demand services rose 0.3 percent, resulting in an unchanged final demand of 0.0 percent.

Meanwhile, the consumer price index (CPI), which measures the cost of living, unexpectedly decreased 0.2 percent in August, the first time it’s done so since April of last year. The all-items index, however, has risen at a rate of 1.7 percent over the last 12 months.

U.S. housing starts had a disappointing downturn last month, the Commerce Department reported, tumbling 14.4 percent to a seasonally-adjusted annual rate of 956,000 units. This decline is even lower than the projected -4.9 percent. Building permits fell 5.6 percent, below the -1.6 percent economists estimated.

Despite a decline in starts and permits from July, homebuilders’ confidence in the market soared to 59.0, according to the National Association of Home Builders/Wells Fargo builder sentiment index. This is the highest such reading since November 2005, before the housing bubble collapsed.

We might see stronger growth in the housing market very soon, as U.S. fixed mortgage rates recently had their biggest weekly jump of the year, following the increase in 10-year Treasury yields on the heels of Yellen’s press conference. This might help light a fire under hesitant homebuyers and encourage them to act. According to the Mortgage Bankers Association’s (MBA) weekly survey, mortgage applications rose 7.9 percent from a week earlier.     

Through the 12 months ended August 2014, the annual U.S. inflation rate is 1.7 percent, below many economists’ and Fed policymakers’ hopeful estimate of 2 percent.

Although lower-than-expected inflation might lead to less pain at the pump and checkout aisle, it can also sometimes lead to a sluggish economy. Debt financing becomes challenging. And as counterintuitive as it might seem, when prices are down, people tend to sit on their money and wait for even better prices to come along.  

Rising prices, on the other hand, often prompt spending. For this reason, a little inflation is welcomed by some companies and their employees. Profits and wages can both increase, which stimulates borrowing and spending. The jump in mortgage rates is a perfect example.

As the U.S. Ends Quantitative Easing (QE), China and Europe Begin

With low inflation also comes the risk of dipping into deflation territory, which China is now facing. The country’s own PPI declined 1.2 percent in August, continuing a 30-month downtrend, while its CPI rose only 0.2 percent from July. Its purchasing managers index (PMI) also dropped last month, as did imports and manufacturing jobs. 

To counteract this slowdown, China’s central bank injected $81 billion to five state-owned banks. So far the market seems to have liked the stimulus measure, as stocks in both the Hang Seng Index and Shanghai Composite Index have rallied, tracking positive stock performance on Wall Street. Only time will tell if the world’s second-largest economy is in a permanent recovery mode, but we’re optimistic.

Like the People’s Bank of China, many central banks around the world continue or are implementing easing policies. The European Central Bank (ECB), for instance, will be buying close to $1.3 trillion in bonds to provide fresh capital to the Union’s depressed banking system. All of this global stimulation activity is good for global financial markets and specifically U.S. equities. We’ll be exploring this very topic in our October 2 webcast, “One World Market, Many Central Banks: How Will Your Investments Be Impacted?”

Scots Vote “Nay” in Historical Referendum

Speaking of one world market, it breathed a collective sigh of relief last Thursday when Scotland voted to stay in its long-term relationship with the United Kingdom. Once the votes were counted, stocks in London rose and the pound bounced up a quarter of a percent.

As a Canadian, I’m familiar with separatist movements. In Scotland, as it is with Quebec, there seems to be a disconnect between wanting to break up the government in order to obtain more government. At a time when there’s so much uncertainty in the world, when members of the eurozone are in the doldrums, when China is trying to jumpstart its economy, when Russia is rattling its saber and ISIS is spreading as quickly as the Ebola virus, the last thing we needed was a major restructuring of one of the globe’s most stable and reliable countries.

Granted, every people has the right to declare its independence for the right reasons. If that were not the case, America might today be in the same family as Scotland. University of Bath professor Chris Martin said it best when he wrote: “The desire for independence seems to be driven by romantic views of a separate Scottish identity and culture rather than by cold economic logic.”

Below you can see the current gross domestic product (GDP) growth forecasts for the U.S., eurozone, U.K. and China. Had Scotland voted “yes” in the referendum, it’s possible that the increased uncertainty might have stalled growth among these powers and altered economists’ predictions.

Indeed, it’s important to realize that the U.S., E.U. and China—the world’s three greatest economic powers—all rely on one another and help drive the rest of the globe.

Even many Scots were apprehensive of the economic implications of leaving the U.K. and, by proxy, the E.U. According to the gold trading firm BullionVault, approximately 40 percent more Scots bought gold in September compared to last year, most likely as a hedge against an uncertain economic future.

Once again, who says gold isn’t currency?

Keep on Keepin’ On

Although the week began with speculation and uncertainty—would the Fed raise rates? would Scotland break up the U.K.?—we ended on more solid ground than some were expecting.

The bull market that we’ve seen this year has continued to charge forward, creating healthy intraday and closing market highs. We can relax for the moment knowing that the Fed isn’t undertaking any drastic measures. And easing around the world has improved liquidity, making it easier for companies and individuals to invest in their future.

These are all good reasons to stay calm and keep seeking and investing in quality equities.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certain investors to the Alternative Minimum Tax as well. The Near-Term Tax Free Fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes. The Near-Term Tax Free Fund may be exposed to risks related to a concentration of investments in a particular state or geographic area. These investments present risks resulting from changes in economic conditions of the region or issuer.

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. The Hang Seng Index is a capitalization-weighted index of 33 companies that represent approximately 70 percent of the total market capitalization of The Stock Exchange of Hong Kong. The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange.

The Producer Price Index (PPI) measures prices received by producers at the first commercial sale. The index measures goods at three stages of production:  finished, intermediate and crude. The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.  The weights of components are based on consumer spending patterns. The Mortgage Bankers Association Market Composite Index measures mortgage loan application volume. The NAHB Housing Market Index is derived from a monthly survey, and gauges builder perceptions of current single-family home sales and sales expectations for the next six months, as well as rating traffic of prospective buyers. Scores from each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

Past performance does not guarantee future results.

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All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Fund portfolios are actively managed, and holdings may change daily. Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end.

Frank Holmes is the CEO and Chief Investment Officer of U.S. Global Investors. Mr. Holmes purchased a controlling interest in U.S. Global Investors in 1989 and became the firm’s chief investment officer in 1999. Under his guidance, the company’s funds have received numerous awards and honors including more than two dozen Lipper Fund Awards and certificates. In 2006, Mr. Holmes was selected mining fund manager of the year by the Mining Journal. He is also the co-author of “The Goldwatcher: Demystifying Gold Investing.” Mr. Holmes is engaged in a number of international philanthropies. He is a member of the President’s Circle and on the investment committee of the International Crisis Group, which works to resolve conflict around the world. He is also an advisor to the William J. Clinton Foundation on sustainable development in countries with resource-based economies. Mr. Holmes is a native of Toronto and is a graduate of the University of Western Ontario with a bachelor’s degree in economics. He is a former president and chairman of the Toronto Society of the Investment Dealers Association. Mr. Holmes is a much-sought-after keynote speaker at national and international investment conferences. He is also a regular commentator on the financial television networks CNBC, Bloomberg and Fox Business, and has been profiled by Fortune, Barron’s, The Financial Times and other publications.  Visit the U.S. Global Investors website at

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