Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morngan as of 03/29/19. Rates and Economic Calendar Data from Bloomberg as of 04/02/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
From the onset we’d like to make clear that we do not believe the Federal Reserve is to blame for slowing economic growth, but before we dive into evidence supporting our stance lets first recap capital market performance for the week. In the U.S., the S&P 500 Index finished the week at a level of 2,834, representing a gain of 1.23%, while the Russell Midcap Index followed suit gaining 1.71% for the week. On the international equities front, developed markets gave back 0.04%, while emerging markets lost 0.06%. Finally, the 10-year U.S. Treasury yield continued its rapid descent lower and finished the week at 2.41%.
As of late, we do not have to look far to find a financial news program chocked full of pundits arguing about what the best route forward is for the Federal Reserve. Such arguments have remained a constant throughout this entire economic recovery, but a new rally cry has started to take center stage in light of the recent slowdown in economic growth. Many have questioned whether the Fed’s pace of interest rate increases is to blame for the current, and expected future, slowdown in growth. It’s indisputable that a good many recessions have, in hindsight, been attributed to the Fed rapidly raising interest rates and essentially strangling future growth prospects. This is a fact, but it is our view that the current scenario presents stark differences.
For one, quarreling that the Fed has pushed rates too high and to a level that restricts growth is to believe that real short-term interest rates (Nominal Interest rates – Inflation) are simply high. However, looking at this through a historical lens indicates otherwise. In fact, the federal funds rate has been higher 64% of the time over the last 60 years.
Next, critics have stated that the Fed’s rapid pace of increases has been compounded by their dual prong approach for raising interest rates; raising the target overnight lending rate, in addition to reducing the size of their balance sheet. The former should place upward pressure on the short end of the curve, while the latter should lift the longer end of the curve. However, the real 10-year yield is currently lower than it has been 88% of the time over the past 60 years.
Moreover, the pace at which the Fed has increased rates has actually been much slower than in previous rate-hiking cycles. The average annual increase in the federal funds in this hiking cycle has been 0.75%, compared to the historic average of 2.4%. Finally, surveys used to discern whether the lending standards of banks have tightened –a sign that interest rate levels have reach restrictive territory—have only registered slightly tighter lending standards.
The takeaway here is that interest rates are not quite as restrictive as many in the media would have us believe, and the slowdown in economic growth can’t solely be pinned on the actions of the Federal Reserve, at least, for the time being. Regardless of who’s to blame, one thing is certain. Economic growth is slowing, which is why we encourage investors to revisit the diversification that may, or may not, be in place within their existing portfolios.
Important Information and Disclaimers
Disclosures: Hennion & Walsh is the sponsor of SmartTrust® Unit Investment Trusts (UITs). For more information on SmartTrust® UITs, please visit www.smarttrustuit.com. The overview above is for informational purposes and is not an offer to sell or a solicitation of an offer to buy any SmartTrust® UITs. Investors should consider the Trust’s investment objective, risks, charges and expenses carefully before investing. The prospectus contains this and other information relevant to an investment in the Trust and investors should read the prospectus carefully before they invest.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.