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Market Perspectives - June 2019


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Market Perspectives - June 2019

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Market Perspectives - June 2019

  1. 1. Market Perspectives - June 2019 Experience Insight Impact Overview: Most of the time, equity markets steal the headlines for many investors. Over the past few months however, fixed income markets have exhibited unusual movement and have become worthy of a deeper discussion. With a dramatic reduction in interest rates, it is once again time to examine the importance of interest rate movement on the broader economy, as well as the role of the Federal Reserve in this process. 1
  2. 2. Yield Movements Experience Insight Impact 2 Since the beginning of 2017, the 10 Year U.S. Treasury yield has come full circle, rising from just over 2% to a high of over 3.2% in Q4 2018, and back towards the low yields of just over 2%. The broader economy cooled off recently after a rapid rise in yields in the first 9 months of 2018. While equity markets have rallied on the equally as rapid rate decline in rates, it has yet to be seen if the economy will shake off weak forward indicators and continue the positive momentum it exhibited in recent years. Source: Bloomberg
  3. 3. Federal Reserve Update Experience Insight Impact 3 As expected, the Federal Reserve (“the Fed”) raised interest rates by a ¼ point at its December 19th meeting. The graph above showed future rate expectations as of 12/20/18. The forward implied probability for 1/29/2020 suggested the Fed would have rates at 2.5%. Source: Bloomberg A mere 6 months later, that expectation for Fed rates had fallen by almost 100 bps. This dramatic change has significantly impacted both equity markets as well as the broader economy.
  4. 4. Federal Reserve (“Fed”) Expectations Experience Insight Impact 4 • The Fed has gone from 2019 consensus Real GDP growth of 2.4% to 2.1% as of the last meeting. Inflation expectations are lower and below target at 1.8%. Unemployment expectations ticked up slightly, albeit still at very low historical levels. • As we pointed out in December, indications were that the Fed was approaching the end of their rate increase cycle. In reality, this accelerated more rapidly than Federal Reserve Board members anticipated due to the combination of falling inflation, GDP expectations slowing modestly, and employment data remaining relatively strong. The chart on the right shows the hike cycle which began in 2016 and potentially has ended (the upper bound of the Fed Rate target is shown here). Source: Bloomberg
  5. 5. Why Do Interest Rate Levels Matter? Experience Insight Impact 5 Last year we used the following charts to describe the importance of interest rates. Over time, increasing interest rates will likely cool economic growth (and vice versa) as borrowing becomes more expensive. 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. Market Perspective - June 2019 Experience Insight Impact Conclusion: Interest rates have become a major focus for market participants. Generally, as borrowing costs decline, economies can advance. Globally, we continue to see central banks pushing rates downward. We continue to monitor fixed income markets both for opportunities as well as signals for the broader economy. 6
  7. 7. Disclaimer Experience Insight Impact Opinions expressed in this commentary may change as conditions warrant and are 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. No graph, chart, formula or other device can, in and of itself, be used to determine which securities to buy or sell, or when to buy or sell such securities, or can assist persons in making those decisions. Consider seeking advice from a professional before implementing any investing strategy. 7