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The Week Ahead – Market Indigestion

| 6/24/19 8:17 AM

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

For me, one of the best parts of summer is seeing my favorite fruits come back to the grocery stores. Plums, apricots, peaches, nectarines, cherries - I love them all! And, it’s not just me, my children (especially the younger one) go bonkers for summer fruits. Unfortunately, my five-year old gobbled down so many apricots last weekend that he ended up with a bad case of indigestion, discovering why you shouldn’t try to make an entire meal out of just fruit!

Shifting to the economy and markets, the bond market is experiencing a case of indigestion taking the form of an inverted yield curve. A so-called inverted curve occurs when interest rates on longer dated bond maturities are lower than their shorter dated counterparts. To wit, the yield on the Treasury bill (30-day government debt) is 2.17% while a 10-year Treasury bond is yielding just 2.01%. This means investors prefer taking more interest rate risk for less yield – seems counterintuitive. However, it is rational if it is believed rates are headed lower, which is exactly what we’ve seen since the third quarter of last year.

While the Fed has been raising the short-term Fed Funds rate, a combination of slowing global growth, benign inflation data and rising geopolitical tensions has been pushing longer-term interest rates down. Now it appears all but certain the Fed will cut the overnight rate as early as next month in order to help normalize the yield curve and help correct some of the global imbalances caused by our relatively high domestic interest rate policy. The market’s assumption that the Fed will cut rates multiple times over the next 12-18 months has been a boon to asset prices with stock indexes now trading at their all-time highs.

Many market pundits view an inverted curve as a flashing yellow light that a potential recession may be looming. As we’ve mentioned numerous times, we do not believe a recession to be imminent as there are simply too many strong economic pillars supporting the further continuation of the recovery. This week we will see the several key economic indicators, many of which continue to show resilience. Specifically, the data for housing, consumer sentiment, and jobs/wages have been very constructive. On the other hand, durable goods orders and the Purchasing Managers Index (PMI), which are being adversely affected by the global slowdown that are somewhat more concerning. As always, we will keep a close eye on these important leading economic indicators for clues as to where the economy is heading. For now, it appears to be more cherries than pits.

Data deck for June 24–June 28:

Date

Indicator

Period

Jun. 24

Chicago Fed national activity

May

Jun. 25

Case-Shiller home prices

Apr.

Jun. 25

Consumer confidence index

Jun.

Jun. 25

New home sales

May

Jun. 26

Durable goods orders

May

Jun. 26

Core capex orders

May

Jun. 26

Advance trade in goods

May

Jun. 27

Weekly jobless claims

6/22

Jun. 27

GDP revision

Q1

Jun. 27

Pending home sales index

May

Jun. 28

Personal income

May

Jun. 28

Consumer spending

May

Jun. 28

Core inflation

May

Jun. 28

Chicago PMI

Jun.

Jun. 28

Consumer sentiment (final)

Jun.



IMPORTANT DISCLOSURE INFORMATION    

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by First Foundation Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from First Foundation Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. First Foundation Advisors is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the First Foundation Advisors’ current written disclosure statement discussing our advisory services and fees is available for review upon request. Please Note: First Foundation Advisors does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to First Foundation Advisors’ web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Brett Dulyea, CFA, CAIA
About the Author
Brett Dulyea, CFA, CAIA
Mr. Dulyea serves as a Portfolio Strategist on the investment team and is responsible for conducting manager research and executing investment strategies for clients. As a member of the investment committee, he provides market commentary and investment insights. Mr. Dulyea’s specializes in advising client portfolios, defining investment plans, and communicating the firm’s investment viewpoints. Prior to joining the firm, Mr. Dulyea was a Director, Portfolio Manager at Deutsche Bank. In addition to working directly with clients, he was a member of the Fixed Income Strategy Group and managed customized portfolios for clients. He previously worked in the Wells Fargo Wealth Management Group as a Vice President, Senior Investment Strategist and at Merrill Lynch as a Vice President, Portfolio Manager. Mr. Dulyea earned his Master’s in Business Administration (MBA) from California Polytechnic University, Pomona and holds the Chartered Financial Analyst® (CFA) designation and the Chartered Alternative Investment Analyst (CAIA) charter. He earned his Bachelor’s degree from the California Polytechnic University, Pomona. He also served as an adjunct Professor of Finance at California Polytechnic University, Pomona for two years. Read more
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