Market Perspectives - June 2019

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.
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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. 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. 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. 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: https://www.economicshelp.org/macroeconomics/monetary-policy/effect-raising-interest-rates/

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.
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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.
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