Update Following Government Shutdown

The situation in Washington is fluid and something we continue to monitor closely. While it is difficult to speculate on the outcome surrounding the US debt ceiling debate, it appears that the lines of communication between Republicans and Democrats are beginning to open.  US Government uncertainty is likely to remain elevated given the “kick-the-can” nature of the budget deal into early next year. This fiscal uncertainty further supports ongoing easy monetary policy, particularly given the dovish leanings of Janet Yellen, the presumptive incoming Fed chairman. In contrast to the United States, Europe has been calm and economies are slowly improving. We remain hopeful that Japan will be successful in stimulating their economy, although policy missteps are quite possible; while China’s growth has acceleration potential in the short term but we continue to have longer-term concerns. Equities pulled back off their highs and then rallied last week, while the US fixed income market has stayed quite calm, although there was some volatility in the short-term T-Bill market. Looking back at the August 2011 debt ceiling fight, both confidence and the economy Read on! →

To Taper or Not to Taper…That is the Question

In a widely watched decision, the Federal Reserve (Fed) surprised markets by not backing off its asset-purchase program.  Most observers were expecting the central bank to begin a modest pullback ($5-10B) in the pace of their continued $85B monthly purchases, so the Fed’s decision to stand pat took many by surprise. By failing to taper, the Fed signaled it believes there are still lingering questions regarding the strength of the US recovery. The central bank remains focused on the fact that while the labor market is improving, it is doing so at an uneven pace.  The Fed also pointed to the fact that more and more Americans have been dropping out of the labor force.   Most importantly, we believe, the Fed is particularly concerned about the resilience of the housing recovery in the face of rising interest rates. The current pledge is not to raise rates until unemployment falls below 6.5% or inflation rises above 2.5% Stocks should do well in this environment. Monetary accommodation and strong profits suggest the potential for more growth ahead. For bonds, it’s more of Read on! →

Bond Market Update: Lions, Tigers and BEARS…Oh, My!

After the longest bond market rally in history (4,571 days) from January 2000 until late July 2012, the US long bond is quickly approaching bear market territory for the first time in over 13 years.  By standard definition, a bear market is a decline of over 20% that was preceded by a rally of at least 20%.  As shown in the chart below, there have been six BOND bull markets and five BOND bear markets since 1980.  Since its peak on July 24th 2012, the long bond is currently down almost 15% … well on its way towards full bear market territory Investors need to be aware that while bonds are a core part of any diversified portfolio they can have bear markets just like stocks!  We have encountered tailwinds for bonds (meaning when rates go down, values go up) since the 1980’s when mortgages were at 14% and you could purchase 30 year treasury bonds with 15% interest.  Interest rates have been cut to zero by the Federal Reserve.  Below is another fantastic chart visualizing long bond bull markets Read on! →

Market-View 2nd Quarter 2013

After some hair-raising summers over the past several years, calm, almost boring, trading has settled in on Wall Street – at least for the time being.  2nd Quarter 2013 earnings season has passed its peak and results have largely been better than expected on the bottom line (earnings), while top-line results (revenues) have been less impressive, but good enough for the drifting stock market to maintain an upward bias. Perhaps the best takeaway has been the positive view of the domestic side of the ledger, while international results have largely disappointed. US Economic Outlook Mixed economic data has been good enough to help corporate earnings, yet weak enough to prevent the Fed from acting aggressively.  We have had a domestic bias for some time now, and we believe the US continues to be an attractive place for investors with sustainable slow GDP growth, low interest rates and inflation, and improving unemployment.  Although the gains in equities seen in the first half of the year shouldn’t be expected in the second half, we remain positive on the potential for further upside. Read on! →

Detroit Bankruptcy (largest in US municipal history) Casts a Shadow on Municipal Bond Market

Barron’s Michael Aneiro spoke this week with Eric Friedland, head of municipal credit research at Schroders, and asked his take on what the Detroit bankruptcy means for the muni market. So far he says it has exacerbated recent market-wide weakness, but it remains a unique case. “There are no other municipalities that we see that are in a similar situation, with population fleeing from the city and demographics that are pretty weak,” Friedland says. “Ahead of this event there was already a big Treasury rate move, and we’ve seen significant [fund] outflows, and since this is a retail-driven market it kind of feeds on itself and can be hard to get out of. This event has added a little more fuel to the fire.” The biggest longer-term impact on the market will likely come from how the bankruptcy court views Detroit emergency manager Kevyn Orr’s attempt to lump general obligation (GO) bondholders in with other unsecured creditors. A general obligation (GO) bond is a municipal bond backed by the credit and “taxing power” of the issuing jurisdiction rather than the revenue from a given Read on! →