Market Commentary – 21st March 2018
All eyes on the Fed…
Today is a big day for the world markets as all eyes will be on the Federal Reserve and what they plan to do about raising interest rates on strong economic growth and better unemployment figures. This will be the first time Jerome Powell, the new Fed Chair replacing Janet Yellen, will make a statement over monetary policy and whether they will exercise the four rate hikes the market is expecting in this year?
Given where global economic growth is and the pace of growth we have experienced in the financial markets, a rate hike seems plausible along with where we are in the economic cycle and the pace of growth we have recently experienced. Economists are expecting the FOMC to take another gradual step towards normalising monetary policy with a hike in the Fed funds rate target range of 25 basis points to 1.50% in today’s meeting. Economists do expect Chair Powell to present a slightly more hawkish outlook, similar to the tone he struck at the recent semi-annual testimony to congress. While some of the Fed’s rate dot plot estimates will likely move higher, it is premature for the median rate expectation to move to four hikes in 2018. This is likely to happen in the June meeting due to higher inflation prints. Economists however think that the four rate hikes this year will be done, given the new Chair’s stance.
Given the fiscal stimulus from the tax cuts and greater government spending, Fed officials will likely increase their GDP growth forecasts in 2018. Economists estimate that fiscal stimulus boosts real GDP growth by 0.7 ppt to 3.0% (Q4/Q4). Economists assume the Fed’s forecast will move up towards their initial forecasts from its December forecast of 2.5%. Beyond 2018, the same economists will examine the Fed’s updated forecasts for GDP, inflation, the unemployment rate, the long-run potential GDP, and the long-run NAIRU projections. Additionally, they will look for any change to the Fed’s long-run neutral Fed funds rate, which is currently 2.75%.
Why do interest rates matter?
Market participants are watching today’s event carefully and Interest rates matter in many different ways that affect not just the U.S. economy, but global central banks and markets. Usually the Fed is seen to be the global central bank as they control the global denominated currency, the USD. One way that interest rates matter is that they influence borrowing costs. Lower interest rates, which is the cost of borrowing as well as the returns on savings and a simple example is that it would encourage more people to obtain a mortgage for a new home or to borrow money for an automobile or for home improvement. Lower rates also would encourage businesses to borrow funds to invest in expansion such as purchasing new equipment, updating plants, or hiring more workers. Higher interest rates would restrain such borrowing by consumers and businesses. The Fed seeks to set interest rates to help set the backdrop for promoting the conditions that achieve the mandate set by the Congress–namely, maximum sustainable employment, low and stable inflation, and moderate long-term interest rates.
For anyone who wants further data to substantiate the position please review the attached Global Economic News Document.
Model Portfolios & Indices
Over the last week we have seen most of the indices that we track portray a mixed picture. Markets are now nervous ahead of the Fed’s decision at 18:00 GMT today. There was a tech sell off in the markets on Monday and the big tech data fears affected the FAANGs (Facebook, Amazon, Apple, Netflix and Google owner Alphabet). The Nasdaq was lower which is tech heavy over concerns on how they user’s data is used from the FAANG group of companies. Tech companies all use data one way or the other as part of their business. They are going to get a bit more scrutiny over what data they are colleting and how they are going to use it. This event dragged the FAANG stocks down and brought the major averages down as a result, as these companies were taking a lot of data and using algorithms to dial in their product. In other markets, Asian markets and Emerging Markets are a mixed story, also being influenced by a cheap USD.
With our portfolios and the correlation to the markets, it is fair to suggest that based on our Outcome Based Investment (OBI) strategy and diversification of assets, the changes we have had in our portfolios is far less than the losses in the equity markets based on market volatility. All figures below are YTD returns and having said that, most of 2018 has been volatile and stock markets have not yet managed to make lost gains. The equity and non-equity content in our OBI portfolios will enable us to achieve lower returns, which are directly correlated to the equity markets and will provide a safe “hedged” position when markets fall the way they did early this week and mid last month. All in all, as 2018 progresses, we do expect most of the returns to come back into the portfolios and offer solid and sustainable returns. With the non-equity content of the portfolios, these will benefit from higher bond yields that we expect and currency fluctuations.
The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the days movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested. Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 1963, the well known prison, Alcatraz closed down. The Alcatraz Federal Penitentiary or United States Penitentiary, Alcatraz Island was a maximum high-security federal prison on Alcatraz Island, 1.25 miles off the coast of San Francisco, California, which operated from 11th August 1934, until 21st March 1963. Famous inmates include Al Capone and Robert Stroud, also known as the “birdman” of Alcatraz. The prison is now a popular tourist attraction.
As always have a wonderful week and stay safe.
Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager