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Market Perspective - September 2018


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Market Perspective - September 2018

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Market Perspective - September 2018

  1. 1. Market Perspective – September 2018 Experience Insight Impact Overview: Interest rate movements continue their upward march. Since last year, the yield curve has continued to flatten with short term rates rising by over 100 basis points. The implications of interest rate changes are often underappreciated by investors. This month, we look into recent interest rate moves, future expectations for further actions from the Federal Reserve, and the potential real world implications of such changes. 1
  2. 2. Current Environment (10-Year Yields) Experience Insight Impact 2 The 10 year treasury note in the United States hovers above 3%, while most of the developed world maintains rates substantially lower. Source: Bloomberg
  3. 3. Current Environment (2-Year Yields) Experience Insight Impact 3 Shorter term yields around the globe remain negative in many cases, while the U.S. has seen rates rise dramatically. Source: Bloomberg
  4. 4. Federal Reserve (“Fed”) Expectations Experience Insight Impact 4 • The top table shows Fed projections for economic growth (Real GDP as a proxy), Inflation (Core PCE as a proxy) and the Unemployment Rate. As you can see, growth remains reasonable, with inflation largely under control despite very low projected unemployment through 2020. • The next table, as well as the graph, demonstrate the expectation for continuous rate increases from the Fed over time. Longer term, however, the Fed believes the median target rate should be 2.875% (vs. 2% as of 9/17/18). • The market, represented by Fed Funds Futures (as of 9/17), suggests that rates will rise to around 2.8% during 2019 and not rise further. • In summary, by the Fed’s own expectations (and the markets’), we will approach the end of the rate hiking cycle within the next few years while the economy is projected to remain stable with inflation under control. Source: Bloomberg
  5. 5. Why Do Interest Rate Levels Matter? Experience Insight Impact 5 Over time, increasing interest rates will likely cool economic growth. The Fed attempts to control economic growth (and inflation) and keep money flowing at a “goldilocks” pace (~ not too hot, not too cool). If this process is managed effectively, cycles can be prolonged. Source:
  6. 6. A Reminder On Yield Curve Inversions Experience Insight Impact 6 Several months back we showed a chart of the prior instances where short-term interest rates exceeded longer term interest rates. This “inverted yield curve” has generally preceded recessions. This chart shows the significant flattening of the curve in the green line (although not inverting) which has been occurring since the end of 2016. While short-term rates have risen by more than 150 basis points (~ 1.50%), the 10-Year has risen by just 50 basis points (~ 0.50%) and the 30-Year has been essentially flat. We are closely monitoring this trend as a possible early indicator of future conditions. Source: Bloomberg
  7. 7. Market Perspective – September 2018 Experience Insight Impact Conclusion: While investors frequently hear the drumbeat of stock market news from various media sources, below the surface, interest rate movements are silently leading the charge. Individuals, corporations and even governments around the globe are impacted with every tick of the bond market. Central Banks around the world are trying to control inflation and economic growth primarily with the powerful tool of fixing interest rates. As conditions dictate, we will transition portfolios to the appropriate mix of securities based on the existing and forecasted rate environment. 7
  8. 8. Disclaimer Experience Insight Impact Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy. 8