Late last year, many prognosticators were predicting the Fed would raise rates several more times in 2019 and interest rates would continue to rise. However, our data-driven process and “investing for all seasons” approach revealed something different- a high likelihood that economic growth would start to slow and interest rates would start to fall.
Now as we begin the second half of the year, all eyes are on the Federal Reserve and investors are asking the question, what happens next?
The Next Move…
Throughout the second quarter, the Fed maintained a more dovish stance, continued to be more accommodative, and decided not to raise or cut rates. However, a rate cut is now almost certain to occur tomorrow. These moves helped the stock market rally higher and drove the 10-year Treasury yield down near 2.0%, the lowest level we’ve seen since late 2016.
With signs of a weakening economy becoming more prevalent, the Fed recently indicated they are prepared to take necessary steps to “support the ongoing expansion.” Based on the federal funds futures market, investors now place the odds of a rate cut in July at 100% and expect the fed funds rate to be a full 1% lower by the end of 2020.
While it is uncertain how interest rates across the yield curve (varying maturity dates) will respond to one rate cut, adding the cautionary evidence from our growth and inflation outlook reveals the most likely path for rates is lower. Moreover, with a supportive Fed, lack of inflationary pressures, and slowing economic growth, interest rates (and mortgage rates) should continue to trend lower over the next couple of quarters.
Our Outlook: NEUTRAL
Although returns have been excellent so far this year, we remain cautiously aware that we are in the late innings of the economic cycle. The rate of economic growth peaked in 2018 and is expected to slow this year. With the possibility of lower inflation, our macro-economic model could shift back into the winter investing season, an environment characterized by heightened risks of a significant pullback. However, our “recession watch” indicators suggest the danger of the economy slipping into recession is not imminent. For a refresher on our “seasons” analogy please see the blog article “Investing for all Seasons.”
How We Can Help
At GGM, aligning your investments with the prevailing economic environment is just one of the ways we strive to add value to your portfolio. If you are concerned about whether your investments are prepared for what’s ahead, we recommend our complimentary portfolio checkup. Contact us today!