Sources: Rates Data and Economic Calendar—Bloomberg Markets as of 9/22/14; Equity Market Returns and Fixed Income and Alternatives Data—Wells Fargo Advisers as of 9/22/14.
Summary of the Federal Reserve’s Economic Projections
Last Wednesday Fed Chair Janet Yellen released the Economic Projections of Fed Board Members and Bank Presidents. This release aggregates the forecasts of GDP, the Unemployment Rate and Inflation and provides interesting insight to the disparity of the individual projections. To summarize this report, below is a table of the central tendency of the forecasts which removes the three highest and lowest projections:
|Change in Real GDP||2.0 – 2.2%||2.6 – 3.0%||2.6 – 2.9%||2.3 – 2.5%||2.0 – 2.3%|
|Unemploment Rate||5.9 – 6.0%||5.4 – 5.6%||5.1 – 5.4%||4.9 – 5.3%||5.2 – 5.5%|
|PCE Inflation||1.5 – 1.7%||1.6 – 1.9%||1.7 – 2.0%||1.9 – 2.0%||2.0%|
What we believe is particularly noteworthy is the latest long run projection for US GDP which ranged between 1.8 – 2.6% with a central tendency as shown above between 2.0 and 2.3%. To put this in perspective, according to Catherine Mulbrandon of Visualizing Economics, between 1871 and 2010 the US economy averaged 3.47%, which, includes multiple business cycles. If we are, as many economists believe, in the midst of a moderate recovery the GDP growth rate begins to look particularly bleak.
Also noteworthy are the inflation projections, the lower end of which run below the Fed’s target for the next three years. With forecasts for inflation running below target for the foreseeable future and the expectation of lackluster economic growth, it comes as no surprise that Yellen kept the “considerable time” language in the policy statement and stressed the data dependency of changes in monetary policy.
The implications that overall economic growth have on the stock market are far reaching and include the effects on investor sentiment, consumer spending, business profitability and the growth rate used to discount equity prices in cash flow models. Investors today are facing a much different economic back drop then they have likely faced in the past and should be careful with both their security selection and asset allocation strategies.
Important Information and Disclaimers
Past Performance is not a guide to future performance.
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.
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Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
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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 REITSs that primarily own and operate income-producing real estate.