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Market Outlook - September 2019

Economy

In the Federal Reserve’s 2018 Q3 release of economic projections, voting FOMC members forecast additional tightening for 2019. The last update from June showed a levelling off for interest rate expectations for 2019. Since then, the Fed has moved twice (In July and recently in September) to lower its benchmark Fed Funds rate to 1.75 percent to 2.00 percent (1/2 of a percent lower from where rates were to start the year). The Fed’s action to cut rates in July was the first cut since the prior recession in 2008. Statements from Chairman of the Fed Jerome Powell expressed a willingness of the Federal Reserve to act as necessary to sustain the current economic expansion, which became the longest on record in July surpassing the expansion which began in 1961.

The current expansion has come at more gradual pace. Measured by the percentage increase in the ending GDP versus initial GDP, the current expansion reflects cumulative GDP growth of 25 percent. This is much lower than the prior two longest expansions beginning in 1991 and 1961, which saw advances of 42.6 percent and 51.9 percent, respectively. Recent manufacturing data and business investment have cooled, brought on by increased trade barriers and signs of economic slowdown. Moving forward, greater emphasis will be placed on consumer sentiment, and whether waning confidence will carry any impact on spending levels.

Equity Markets

August was marked by increased volatility causing performance for stocks in developed markets to turn negative for the month, falling -1.9 percent. Equities of emerging markets performed slightly worse, falling 2.5 percent. US equities, measured by the S&P 500, fell 1.6 percent following 2 prior months of strong gains. The Cboe Volatility Index (VIX) rose to its 2019 high in August. Equity markets sold off sharply to begin the month at the announcement of an additional round of tariffs by President Trump. The announcement caused the Chinese currency (Renminbi) to sell off, falling below 7 to the US Dollar. The exchange rate reached its lowest level since the Global Financial Crisis.

European markets were weighed down by a deteriorating manufacturing sector in Germany. A second consecutive quarter of contraction would send Europe’s largest economy into recession. European equities fell 2.5 percent for the month. Global central banks from the Federal Reserve and European Central Bank have worked to lower interest rates, with the latter implying a restart of its bond purchase program. Despite recent cuts from the Fed, the sustained curve inversion is expected to pressure the Fed into cutting a third time before year-end. Research from the Fed has shown that monetary policy decisions have a lagged impact on the real economy.

Fixed Income Markets

At the September FOMC meeting, the Federal Reserve followed through on market expectations for a 25-bp rate cut, lowering the target range for the funds rate to 1.75 - 2 percent. Remarks from the Fed reflect that the decision was a response to uncertainty around trade policy, slowing global growth, and muted inflation pressures. Post meeting movements in the Treasury market reflected a “hawkish” reaction from investors, with two-year Treasury yields closing 8 bps (.08 percent) higher than prior to the announcement. Futures market pricing currently implies one more cut by year-end but the FOMC may need to see weaker economic data or increased trade tensions for this to take effect.

In the face of elevated global uncertainties, fixed income investors may find it appropriate to maintain a cautious duration stance with modest risk exposure. Further stimulus, and the resulting carry erosion, may provide support for spread duration toward the belly of the curve relative to the front end. Securitized credit sectors, such commercial mortgage-backed securities, residential mortgage-backed securities, and agency mortgage-backed securities are consistent with this view, reducing exposure to global growth risks.                                                               

Alternatives / Real Assets

The US Energy Information (EIA) reported global (Brent) oil prices fell ~$5/barrel (b) in August to $59/b. Since August 2018, global prices are $13/b lower. The EIA forecasts global oil prices to average $62/barrel. To date, global demand growth has slowed in 2019 (forecasts have been revised lower for the past 7 consecutive months) but is expected to rebound in 2020. The rise in demand next year is expected to be offset by increased production.

In precious metals, gold prices rose for a fourth consecutive month in August finishing +6.3 percent. Gold bulls point to rising geopolitical risks and its relative attractiveness as a zero-yielding asset versus the increasing level of negative-yielding fixed income market for the recent trend higher.

Securities offered through Rehmann Financial Network, LLC, member FINRA/SIPC. Investment advisory services offered through Rehmann Financial, a Registered Investment Advisor.

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