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 - September 18, 2015

A Macro View – Much Ado About Nothing

Thursday’s meeting of the Federal Open Market Committee (FOMC) was the focal point of nearly every market commentator, economist and money manager for the last four months. It was certainly the first meeting in several years where the outcome was in any sort of doubt. Yet, as it has for the last year since it ended new bond purchases under the quantitative easing process, the Fed again declined to raise the Fed Funds target rate from its current 0.0-0.25% range. The U.S. equity markets gyrated for the remainder of the afternoon, but the S&P 500 Index closed down less than 0.30% on the day. On the bond side, Treasury yields from 2 years to 10 years closed down 11-13 basis points, almost exactly where they ended up last Friday.

Even had the Fed raised its target rate by 25 basis points investors, professional and amateur alike, should have shrugged at the announcement and moved on with their day. The news might have created some short-term volatility in the markets (as though we haven’t seen rampant volatility over the last 90 days), but in the end, a modest increase in borrowing rates isn’t likely to have a significant impact on domestic economic growth. That won’t come until we see the cumulative effect of at least three or four quarter-point hikes. Chairwoman Yellen has stated clearly that when the Fed does move, it will be at a slow and gradual pace, far slower than any hiking cycle in the last 30 years, and we likely won’t see that third or fourth hike for at least nine months after the first one. Right now the bond market is pricing in roughly a 60 basis point increase in the 1-year Treasury, to 1%, over the next 12 months, meaning the Fed Funds rate won’t have hit its third hike by then.

Similarly, when a hike in rates does come, it won’t be the end of your fixed income portfolio, especially with the expected slow glide path. Since 1986, the smallest increase in the Fed Funds rate during a hiking cycle was a total of 1.75% over the course of 13 months, from mid-1999 through mid-2000. An even slower pace of rate increases will minimize the price loss on current bonds, and will allow the income component, as small as it is today, to overcome most, if not all, of it. In fact, during the 13 months of the 1999/2000 rate hike cycle, both the Barclays US Aggregate Bond Index and the Barclays Intermediate US Government Credit Bond Index rose by nearly 4.5% on an annualized basis. Of far greater impact on the fixed income markets than these marginal rate hikes over the next 12 to 24 months will be domestic and global macro events, similar to those that have driven returns since early 2009, when Fed Funds hit the zero-bound level. Global uncertainty in places like Greece, Ukraine and China will have both short-term and intermediate-term effects. General investor sentiment, particularly in the municipal bond market, will increase or decrease demand for fixed income securities, moving the prices and yields appropriately. And, as exemplified by the non-investment grade corporate and emerging markets, company- and country-specific events will have a significant bearing on excess returns.

In the end, professional fixed income investors are far less worried, at least at this point, about whether the Fed now will hike rates in October, December or in 2016. Rather, they are focused on managing their exposure to broad, global macro risks and company- or country-specific fundamentals to deliver their stated risk/return profile. Shouldn’t we retail investors follow their lead?

Download the full PDF

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.

© 2015 Envestnet. All rights reserved.