Market Commentaries

  • How Do Lower Rates Stimulate Economic Growth?


    Market Overview


    Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 07/12/19. Rates and Economic Calendar Data from Bloomberg as of 07/12/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.

    Happening Now                   

    Global capital markets were mixed on the week as investors digested favorable economic data and dovish central bank commentary. In the U.S., the S&P 500 Index pushed ahead to a level of 3014, representing a gain of 0.82%, while the Russell Midcap Index gained 0.51% for the week. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, lost 0.34%. On the international equities front, developed markets moved 0.54% lower, while emerging markets fell 0.75%. Finally, the 10 year U.S. Treasury yield was unchanged on the week closing at 2.12%.

    It seems fairly evident, following Federal Reserve Chairman Jerome Powell’s commentary last week, that the Federal Reserve will, in-fact, cut short-term interest rates on July 31st. When the Federal Reserve decides it’s necessary to stimulate economic growth through monetary policy they cut interest rates by lowering the Federal Funds Target Rate. They do so with the intention of easing borrowing standards for three vital cohorts: businesses, consumers, and the government. Considering that every financial news outlet has covered the Fed’s pending interest rate movement ad nauseam, we believe that it would be useful to describe the mechanisms that transmit these interest rate cuts into economic growth.

    1. Business Spending -> Lower interest rates provide incentives for businesses to borrow and invest those borrowed funds potentially into new projects. This increase in capital spending should lead to increased hiring, which may lead to increased consumer spending.
    2. Consumer Spending -> Lower short term rates lead to lower mortgage and credit card interest payments, allowing consumers to potentially increase their level of consumption. This is particularly important considering that consumer spending accounts for roughly 68% of Gross Domestic Product (GDP).
    3. Government Spending -> Decreased short term rates allow governments, just like businesses and consumers, to borrow more for less. Ultimately this can lead to amplified government spending, which would result in higher GDP, all other things held constant. While not as important to economic growth as consumer spending, government spending still accounts for approximately 17% of GDP.

    Only time will tell if this round of interest rate cuts will provide the degree of stimulus expected and/or desired, but in the meantime we encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolios through various market cycles within a well-diversified framework that is consistent with their objectives, time-frame and tolerance for risk.

    Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

    There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
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    The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.

    Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.

    Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.

    Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.


    MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.

    MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.

    Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.

    ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.

    ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.

    Investors cannot directly purchase any index.

    LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.

    The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.

    The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.

    DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.

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