PMC Weekly Review - June 24, 2016
The financial markets invoke images of a zoo, with dogs of the Dow, bulls, bears, hawks, and doves. The latter two refer to the mindset of the Federal Reserve (“Fed”) regarding monetary policy. Hawks focus on inflation, and therefore prefer tighter monetary policies, like higher interest rates. Doves focus on low unemployment, and therefore favor expansionary monetary policies, such as lower interest rates. This dichotomy stems from Congress’ dual mandate for the Fed: maximum employment and price stability (or low inflation). Current Fed Chairwoman Janet Yellen was called a hawk during the economic boom in the 1990’s, but lately has been considered to be a dove. In her June 21-22 remarks, The Economic Outlook and the Fed Monetary Policy, Chairwoman Yellen neither cooed like a dove nor screeched like a hawk. Instead, she glided between conservative optimism about the economy and cautious monetary policy.
In her semiannual congressional testimony, Chairwoman Yellen stated that “the economy has made further progress toward the Federal Reserve's objective of maximum employment,” but that the pace in doing so has slowed more recently. She drew attention to irregular and low GDP, lower foreign growth due to the dollar’s strength, and weak business investments. These statements were contrasted by recognizing increased household spending and the possibility for growth in the US. Just as the domestic economic future seemed muddled, so did the international economic outlook, with concerns about China’s slowing growth and Brexit concerns. Note that in this week’s referendum Britain voted to leave the European Union. While Chairwoman Yellen stated this could cause “significant repercussions” she also stated that she doesn’t think this outcome is likely to cause a US recession. In fact, the Chairwoman notes that even though the chances of a recession in the US are low, these current economic conditions warrant cautious monetary policy.
Over the last year, the Fed’s monetary policies supported the labor market, targeted a 2% inflation rate and a federal funds rate between ¼ and ½ percent. To maintain this rate, the Fed purchased government securities in what is commonly referred to as “quantitative easing,” which led to a massive $4.5 trillion balance sheet for the Fed, which in turn requires these maturing Treasuries to preserve said rate. As investors continue to look for clues and signals that indicate future rate hikes and their timing, it seems that these increases will likely be gradual, and will be implemented over a longer term. The expectation is that the federal funds rate will be less than 1% through 2016, and less than 2% through 2017. This expectation is grounded in the hawkish sentiment that higher rates, which could strengthen the dollar against other currencies, would decrease foreign investment and domestic growth.
Nonetheless, Chairwoman Yellen stated that the Fed is carefully monitoring the labor sector, a dovish sentiment, but not fully relying on it. In short, Chairwoman Yellen’s testimony to Congress was both hawkish and dovish, as she focused on both employment and inflation. Overall, she painted a picture of a US economy that has both positives and negatives, and forecasted a Fed funds rate that will continue to remain historically low.
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.