Market Commentaries

  • To Cut, or Not To Cut…that is the Question


    Market Overview


    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.

    Happening Now                   

    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.

    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.
    China Trade
    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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