Gill Capital Partners August 2019 Market Commentary
What are we talking about at Gill Capital Partners?
Our Investment Committee meets regularly to review portfolio allocations, macro-economic events and our investment managers. Below are some areas that are currently top of mind within the Committee.
Interest Rates – Whatever happened to rising rates?
A little more than six months ago, the stock market was in the midst of a sizeable correction triggered by another rate increase by the Federal Reserve, and more importantly, the expectation of additional rate hikes. The yield on the 10-year U.S. Treasury was 3.25% and the general consensus was that interest rates were heading higher, as economic conditions were looking ripe for inflation and continued growth. Fast forward to today: the Federal Reserve abruptly began cutting interest rates for the first time since the financial crisis and the yield on the 10-year U.S. Treasury is now 1.5%, the lowest since 2016 (1.3%). The market expects the Federal Reserve to continue easing this year, with multiple rate cuts baked into bond prices. This economic whiplash is confusing at the very least, and leaves many asking, “What has changed? And how does this make sense?”
A big part of the answer to those questions rests with understanding relative values from a global perspective. When interest rates peaked last year at around 3.25% on the 10-year U.S. Treasury, only Japanese bonds yielded less than zero. Today, negative-yielding bonds total over $16 trillion globally, including the sovereign debt of Austria, Japan, Germany, and others. While the theory and implications of negative interest rates are not the focus of this communication, understanding that the majority of global interest rates are much lower than those in the U.S. and, in many cases, negative, is important. From a relative value perspective, our interest rates, even as low as they are today, represent an attractive rate of return compared to many other global rates. The chart below compares 10-year government interest rates for the U.S., Germany, and Greece. At roughly 1.5%, 10-year U.S. Treasuries represent a significant pickup in yield, particularly for an investor in German bonds, who is guaranteed to lose 0.4% per year on their investment. Possibly even more interesting is that interest rates on U.S. Treasuries are roughly the same as comparable term bonds backed by the Greek government, which carry dramatically more risk from a credit perspective.
Global interest rates are acting as an anchor of sorts, holding U.S. rates lower than they otherwise might be.
Global central banks (including the Federal Reserve), have begun cutting interest rates based upon chronically low inflation, escalating trade wars, and the potential for an economic slowdown. We are seeing signs of potential economic weakness in the form of an inverted yield curve, a slowdown in manufacturing, and weakening leading indicators, and yet the stock market is still near all-time highs. While this seems like a disconnect, the stock market is often times dislocated from macro headlines. The Federal Reserve is taking a much more proactive approach than they ever have in an effort to stave off a recessionary environment. While many investors are fearful to own stocks here, low interest rates, muted inflation, and a strong corporate and consumer environment can continue to support higher equity prices for some time, particularly given that equity valuations are near their long term average and not overly expensive. Bonds, on the other hand, are looking exceedingly expensive and offer little value here for investors, particularly longer dated bonds, that have seen significant price appreciation this year are appear overvalued. It is a tough time to be allocating to bonds, and we are being very thoughtful in making fixed income investments.
Gill Capital Partners -Client Appreciation Event
This year’s Client Appreciation Event focuses on one of our Core Values – “Give Back”. Our clients and their guests are invited to our “Chips for Charity” casino night fundraiser, where they will experience the fun and excitement of playing with professional dealers. The event will be held at the Vehicle Vault Museum in Parker, CO. Guests will eat, drink, and play amongst a fabulous collection of rare and exotic automobiles from all over the world. Guests will be given $500 worth of chips to play with for the charity of their choice. At the end of the evening, Gill Capital Partners will donate to the winners’ chosen charity. This event will be held at the Vehicle Vault Museum in Parker, CO Friday, September 6th from 6-10pm. For more information or to RSVP, please contact Erin at email@example.com or (303) 296-6260.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.