The Market Digest

Market Digest

2.6.19

Historically Low Interest Rates?

As expected, last Wednesday, the Federal Open Market Committee (FOMC) unanimously voted to keep the fed funds target rate range unchanged at 2.25% to 2.50%.

Fed Chair Jerome Powell indicated the Fed is not on a fixed path to push rates higher, is content with being patient in its policy approach and is open to curtailing its balance sheet normalization effort if necessary. After his comments, stocks rallied again.

Most market observers point out that although we are in the midst of a tightening cycle - albeit it in a pause for now - rates are still low by historical standards. But are they? A new paper from the National Bureau of Economic Research (NBER), titled, Are Interest Rates Really Low? calls that notion into question.

The researchers focused on real, or inflation-adjusted, interest rates from the perspective of a taxpaying investor. Based on their calculations, the one-year Treasury yield, currently at 2.6%, falls to 1.9% on an after-tax basis. Since inflation is running at about a 1.9% pace, that gives an after-tax real yield close to zero.

But, after applying those same calculations to historical yields, the current after-tax real yield on the one-year Treasury is quite close to the historical average back to 1950, nearly 70 years ago—and higher than at any time since mid-2007 (see chart above).

What are the implications of this research? For one, taxes matter. And a failure to adjust for taxes might lead to incorrect inferences about how current rates compare to historical norms. Second, accounting for inflation makes a difference in how we understand today's environment. If you only focus on nominal rates (or those that don't measure rates on an inflation-adjusted basis), today's rates look drastically different from the late 1970's/early 1980's when Treasury yields rose to double-digits. But, believe it or not, 20-year Treasury yields today are actually higher than where they stood in 1979 and 1980 when adjusted for inflation.

In investment terms, one could make an historically-based argument that, on an after-tax real yield basis, rates today deserve to fall as much as they do to rise. In our business, that's known as a contrarian view.

Market uncertainty goes with the territory in investing. At New Market Wealth, we utilize actively managed fixed income strategies to ensure we are maximizing after-tax, real returns. We keep a close eye on Fed policy, economic data and the individual needs of our clients. We work with managers who have the experience to understand today's opportunities within a historical context, and the expertise and resources required to adjust portfolios based on changing market conditions.

Market Update

Equity Market Index Returns through Feb 1 2019

After a slow start, US Equities ended the week - and the month of January - solidly in the black. Fourth-quarter earnings reports drove much of the market’s trading and with generally better-than-feared data and a dovish-minded Fed, equities rallied. While housing numbers continue to show weakness, Friday’s monthly payrolls report revealed that employers added almost twice as many jobs as expected in January, and manufacturing activity in January also rose above consensus expectations.

Economic News

S&P 500

Despite trade wars and the historically long government shutdown, January was a banner month for stocks . And it came after the worst December the markets had seen since the Great Depression.

As shown in the chart above, the S&P 500 had its best month in more than three years, and with a return of 7.9%, it was the best start to a year since 1987.

Jobs Report

Very strong demand for labor is the key takeaway from the January report. Nonfarm payrolls surged 304,000 - roughly double expectations. Construction and transportation sectors were surprisingly strong and professional and business services extended their healthy run.

Unemployment ticked up one tenth to 4.0% yet the labor participation rate also rose one tenth to 63.2%. The year-on-year rate for a verage hourly earnings remained unchanged at 3.2%. This points to still subdued wage inflation and encourages the Federal Reserve to maintain a wait-and-see stance.

The Water Cooler

Want a More Productive Workforce?

Get an XBox

Move over trust falls and ropes courses, turns out playing video games with coworkers is the real path to better performance at the office.

Researchers at BYU have published a study on the productivity of workers, finding that companies could save thousands of dollars on team-building activities by simply having workers play video games together.

Researchers randomly organized 352 people into 80 teams, making sure no participants with pre-existing relationships were on the same team. They were sent out on a geocaching exercise and then randomly assigned to spend 45 minutes either (1) playing team video games, (2) having quiet homework time or (3) participating in a goal training discussion designed to improve their results. After that, they participated in a second geocaching exercise.

While the goal-training teams reported a higher increase in team cohesion, the video gamers increased actual performance on their second round of geocaching, raising average scores from 435 to 520.

“Team video gaming may truly be a viable — and perhaps even optimal — alternative for team building,” said lead researcher Mark Keith, associate professor of information systems at BYU.

New Market Wealth Management offers the personalization of a boutique wealth manager coupled with the knowledge and resources of a large firm. Through our strategic partnership with Cliffwater LLC, a leading institutional research and advisory firm, and a minority partner, New Market Wealth Management specializes in an endowment style of alternative investment previously afforded to only large institutions.

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