To Cut, or Not To Cut…that is the Question06-18-2019 |
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 06/14/19. Rates and Economic Calendar Data from Bloomberg as of 06/14/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global capital markets predominantly moved sideways last week as investors presumably sat on the sidelines waiting for more clarity regarding potential interest rate cuts by the Federal Reserve. In the U.S., the S&P 500 Index pushed ahead to a level of 2887, representing a gain of 0.53%, while the Russell Midcap Index gained 0.37% for the week. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 0.58%. On the international equities front, developed markets moved 0.26% lower, while emerging markets gained 0.90%. Finally, the 10 year U.S. Treasury yield was unchanged on the week and remains at 2.09%.
Jerome Powell, Chairman of the Federal Reserve, is expected to speak publicly about the current state of the economy this upcoming Wednesday. Mr. Powell’s prepared remarks are likely to detail developments and forecasts related to gross domestic product (GDP) growth, employment, inflation, and interest rates, but make no mistake, investors will be tuning in to hear whether or not the Fed plans to decrease the Federal Funds Target Rate.
As it currently stands, the federal funds futures market is pricing in a decrease of about 70 basis points (i.e. 0.70%) by the end of 2019, which would represent approximately three rate cuts by the Fed. Keep in mind that the Fed increased rates by 25 basis points (i.e. 0.25%) at a time over the last few years, and we’d expect them to use the same increments if they did in fact choose to adjust rates lower. More importantly, the Federal Funds Target Rate currently sits in a range of 2.25% to 2.50%. Given this level, the Fed would have the ability to decrease rates nine times before interest rates reach zero, assuming that they adjust rates by 25 basis points (i.e. 0.25%) each time.
In our view the federal funds futures market is slightly off base in its expectation for three rate cuts by year end and here’s why. Historically, lowering benchmark interest rates has long been used as a tool for stimulating economic growth, often after other forms of stimulus have failed. It would surprise us if the Fed chose to use 1/3rd of their remaining stimulus while the economy is actually in fairly good shape and unemployment is at its lowest level since 1969. Regardless, the chance for interest rate cuts in 2019 exists.
Given all of the uncertainty around the Federal Reserve, trade negotiations and future political elections, 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. If you would like to learn more about how we are helping clients invest dynamically and consistently with their own goals, time-frame and tolerance for risk, please do not hesitate to speak with your Hennion & Walsh Financial Adviser.
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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.
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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.
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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.