PMC Weekly Review – March 25, 2019
Springing Forward: Cleaning House, Evaluating Progress, & Planting Seeds of Growth
Happy Spring Equinox. Spring is in many ways a rebirth of the year. It is a natural time for us to pause, reflect, clean house, evaluate progress, and plant seeds for the best path going forward. For many, the changing of seasons marks an opportunity to reprioritize objectives and bring goals back into alignment. The Federal Open Market Committee (FOMC) did just that on Wednesday, tempering expectations for further interest rate increases in 2019, and signaling the upcoming end to its Treasury roll-offs and balance sheet reduction efforts in September. The decision came amidst a new set of data that suggests that the US economy is perhaps not as robust as the FOMC had hoped—with indicators such as inflation, unemployment, and gross domestic product (GDP ) growth registering weaker than expected.
Although the decision to pause was not unexpected, given Chairman Jerome Powell’s earlier remarks in January that the Fed would remain patient, it is certainly a pivot from December’s FOMC meeting just three months ago, in which the majority of committee members presumed that there would be at least two increases this year. Notably, last December, 11 of the 17 FOMC members believed that there would be two interest rate increases in 2019, compared with only two members when they met this past week. Among the chief concerns cited were weakness in business investment and consumer spending, as well as a slowing domestic growth picture clouded by concerns over the US-China trade war, fading US tax stimulus, and a broader global slowdown across Europe and China.
The FOMC’s decision to delay further interest rate hikes sent jitters through the markets. Equities initially pulled back over concerns about the slowing growth, and the reduced rate expectations translated into sharp declines in bond yields. The decrease in rate expectations particularly hurt bank stocks on the prospect of lower net interest margins. Equities have since recovered, led by the technology sector, but investors remain concerned about the real possibility of a recession, especially given the dynamics of today’s inverted yield curve.
On Thursday, European leaders agreed to extend the deadline for Brexit, much to the relief of Prime Minister Theresa May. The terms of the extension offered by the EU were two-fold: (1) If the Prime Minister obtained approval from Parliament for her plan of exiting the Union by the end of next week, the date would be pushed back until May 22; (2) If she did not obtain approval, the deadline instead would be a much shorter reprieve of April 12. Mrs. May has been very vocal in her promotion of the now twice-rejected plan and Britain’s reluctance to participate in European Parliament elections in May, which may have resulted in a longer extension.
Among other leading indicators this week, domestic initial jobless claims fell more than expected (221,000 versus the previous week’s report of 230,000), gold inched higher, and the price of a barrel of crude crossed the $60 mark for the first time since November. Energy stocks were hard hit in the fourth quarter, as the price for a barrel of crude fell precipitously during the period, declining more than 40% on the heels of soaring US production related to the shale boom. Since then, oil has recovered, propped up by production cuts initiated by OPEC countries to offset the increased US supply.
All things considered, it appears the Fed was prudent in its decision to forego raising rates for the time being, exercising caution given weak economic data and growing geopolitical concerns. Although slow growth need not necessarily translate into a recession, investors may be best served by acknowledging the increased risk in the economic environment, and positioning portfolios to be hedged and diversified with sources of uncorrelated return. For most, this spring will be a time of planting rather than harvesting, but with the correct care, our crops can remain protected and well nourished for the path ahead.
Cynthia Crandall, CAIA
VP, Senior Investment Analyst
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.
© 2019 Envestnet. All rights reserved.