The Federal Reserve Board cut the rates by 25 bps, which was widely expected by the markets. However, the Federal Reserve dot-plot (which projects the fed funds rate) now suggests that there are not going to be any additional cuts this year or next year. The recent Fed statement and press conference was somewhere from being mixed to a little dovish at best. Chairman Powell did suggest that the Federal Reserve might need to resume balance sheet expansion (QE) earlier than expected, should there be more momentum towards downside. With the 10-year treasury at 1.7%, the 30-year treasury at about 2%, the core CPI-ex food and energy above 2%, we already have negative real interest rates in the US.
There were some interesting developments in the overnight money market recently. The repo rates spiked to over 8% on the 16th of September which caused panic among a lot of market participants. There are many of reasons for the repo rate spike which includes corporate tax date, bill supply and coupon settlement. Some are also attributing the spike to the recent oil refinery attacks on Saudi Arabia with the oil nation scrambling to keep up with their dollar spending commitments. Also, according to JP Morgan - The sudden pullback in liquidity and its impact on the repo markets are not a new occurrence. Recall the sudden market closure in honor of the late George H.W. Bush last year, and the incident earlier this year in the days leading up to April 15th and Good Friday, both of which prompted the repo markets to be significantly dislocated. In both instances, the sudden pullback in liquidity via MMFs and banks, as corporates withdrew their cash to either fund their tax payments or maintain their liquidity during market holidays, resulted in repo participants scrambling to finance their collateral longs.
We have seen the NY Fed step in and agree to conduct a series of overnight and term repurchase agreements to help maintain the federal funds rate within the target range and provide requisite liquidity to the repo market until Thursday, October 10, 2019.
On a bigger scale, we have not seen the below investment grade credit spreads widen and sell-off in the equities. In fact, the high yield credit spreads to the treasuries contracted from 453 bps to 380 bps on the 17th of September. The trade talks will again take center stage as we approach October and the equities will continue to be volatile as the uncertainties linger.
In the equities, value stocks have been staging a comeback in the last month. According to a report from Bank of America Merrill Lynch “Earnings growth is expected to hit bottom in the fourth quarter of 2019 and then re-accelerate in 2020. Since 1982, value stocks have outperformed growth by an average of 3 percentage points when profit growth has been accelerating. The Russell 1000 Value index returned an average 16% during those periods, compared with 13% for the Russell 1000 Growth Index.” We will see if the small caps and mid-caps continue to keep the trend up and set up new highs, which will be a very positive development for the equities. We will continue to monitor the financial market conditions and keep you abreast of further developments.
If you still have additional questions about your investments, please feel to contact your Financial Advisor.
Source: marketwatch.com
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The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.
Stock investing involves risk including loss of principal. Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time. The prices of small and mid-cap stocks are generally more volatile than large cap stocks. Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. Portions of this material were prepared by LPL Research. The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
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