Investors Await the Fed’s Decision on Interest Rates
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 06/08/18. Rates and Economic Calendar Data from Bloomberg as of 06/12/18. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global equity markets experienced strong gains last week as investors concentrated more on the positive jobs report and easing political concerns in Europe, and less on general trade and tariff-related tensions. In the U.S., the Dow Jones Industrial Average led the pack returning 2.79%, followed by the S&P 500 and the Russell 2000 Indexes returning 1.66% and 1.51% respectively. Internationally, developed and emerging markets both posted gains with the MSCI EAFE and MSCI EM Indexes up 0.96% and 0.54% respectively last week. This week will be jammed packed with central bank, political, and economic events, however, for the purpose of this week’s update, we will focus on the upcoming Federal Open Markets Committee (FOMC) meeting in the U.S.
The second rate hike in 2018 of 0.25% is all but imminent, in our view, after this week’s FOMC meeting concludes. This will bring the topic of rising interest rates back to the top of many advisor/client conversations. After this June increase, we believe that there will likely only be one additional rate hike of 0.25% in 2018 and three potential rate hikes of 0.25% each in 2019.
However, it should be noted that rate hikes will not be the only tightening tool that the Fed will likely utilize during this period of tightening. In fact, we believe that they will start to consider increasing the pace of balance sheet reductions by selling bonds off of their balances sheet in addition to not reinvesting redeeming bond positions. This 1-2 punch of raising short term rates and influencing long term rates through balance sheet reductions of longer-term U.S. Treasuries by the Fed should also help to alleviate any concerns of a potential yield curve inversion (i.e. a situation where the shorter term end of the yield curve is higher than the longer term end of the yield curve).
The effects of interest rates on the economy, and more specifically from an investment standpoint, asset classes and sectors, can vary significantly. Understanding the relationships can be critical when choosing allocations within the context of an investment portfolio. As a result, we encourage investors to revisit their portfolios to help ensure that they have the appropriate diversification in place while also being positioned in accordance with their own specific goals and investment timeframe. If you would like to know how we are helping clients navigate this market environment, or to simply have a comprehensive review completed on your current portfolio, please do not hesitate to speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
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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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.