Error message

Warning: implode(): Invalid arguments passed in envestnetpmc_mod_views_pre_view() (line 65 of /mnt/www/html/envestnetpmc/docroot/sites/all/modules/custom/envestnetpmc_mod/envestnetpmc_mod.module).

Commentaries

PMC Weekly Review - March 18, 2016

A Macro View: Disappearing Dots Late in the Game

On Wednesday, the Federal Reserve (Fed) decided to maintain rates at their current level. More importantly, the Fed’s forward-looking expectations for rate increases (the dots) have gone from forecasting, just a couple of months ago, four rate increases in 2016, to yesterday’s forecast of just two rate increases. Interestingly enough, when the Fed raised rates in December, and targeted four increases for 2016, the futures market was predicting only a 50 bps rate rise this year, which is now what the Fed is targeting.

Currency markets quickly reacted, as the US dollar weakened, and other markets digested the news. Beyond the markets’ short term reaction, the slowdown in rate hikes raises concerns in the long term about how much dry powder the Fed and other central banks have at their disposal, given the state of the world economy. The truth is, economic growth has been slow since the massive injection of liquidity post the credit crisis, with annual GDP growth in America averaging around 2% since June of 2009. With so much liquidity injected into the system for so little an increase in
economic output, the question becomes: What can central banks do if we enter another recession, considering rates are at record lows and trillions of dollars/euros/yen have already been printed?

Interestingly, Bank of America Merrill Lynch recently released a survey of fund managers in which 59% believe we are nearing the end of the game in terms of world economic growth. The signs are starting to emerge: a rapid decrease in commodity prices; concerns in the credit markets; and increased equity market volatility. Although asset prices quickly inflated after the credit crisis of 2008 due to a large injection of central bank liquidity, economic growth has not been as robust. This has exacerbated a number of social issues, ranging from increasing the wealth disparity (those with exposure to risky assets in 2009 have become much wealthier while those without continue to struggle) to reducing cash flow to older Americans who rely on “clipping coupons” to fund their retirement income needs. To paraphrase Winston Churchill, never has so much liquidity been used by so many central banks to benefit so few people. Economic growth has been slow, the wealth disparity has increased, and the reflation of asset prices has had the biggest benefit for those who already are wealthy.

In addition to these social ramifications, there is real concern over how much dry powder central banks have to fight the next recession. If we are nearing the end of economic growth, what options will they have to prop up the economy? This is a real concern, and is why some investment professionals have been lowering their long-term forecast of stock market growth. No matter how much liquidity you place in the system to re-inflate assets, stocks need economic growth for long-run appreciation. The question is: Will central banks have the tools to stimulate the economy if we slide into a recession? Many investors are concerned they will not, and that should concern us all.

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.

Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.

Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.

Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.

Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.

© 2016 Envestnet. All rights reserved.