Wednesday, August 1, 2018

Investment Perspectives Podcast, Episode 3: Economic Cycles, Quantitative Tightening, and August Market Trends

This Investment Perspectives explores major inflection points in economic cycles, practical experience with Quantitative Tightening, and August trends in the market.

You can read the full Investment Perspectives here.

In this month's issue:

“Cycling Along"
Mark Luschini
We expend a lot of energy trying to get a fix on where we are in the business, monetary, and, most importantly, market cycle. Why? Because the cycles are linked. Monetary policy exerts significant influence on the economy and markets, especially as it oscillates between accommodation and restriction. We hold that the timely recognition of the major inflection points in these cycles is a key driver in positioning portfolios to reap the benefits of investment returns judged most likely to follow.

“Quantitative Tightening”
Guy LeBas
Quantitative Easing or QE, the informal name for the program of Federal Reserve bond buying that began in 2008, is long dead. Between August 2008 and November 2014, the Federal Reserve purchased roughly $3.6 trillion of intermediate to longer-term Treasuries, agencies, and mortgage-backed securities. From 2014 until 2017, Fed officials meanwhile had a policy of taking maturing bonds and reinvesting the proceeds into new securities, essentially keeping the size of its holdings unchanged for about three years. Finally, starting late last year, and in Janet Yellen’s last real act as Fed Chair, the Federal Open Market Committee (FOMC) began allowing their portfolio of bonds to begin running off—at first gradually, and then faster, rising to as much as a $50 billion per month pace later this year. Contrary to popular belief, the Fed will not be selling bonds, just allowing bonds to mature, but in many ways the difference is academic.

“Lazy, Hazy, and Sometimes Crazy"
Greg Drahuschak
The final month of the traditional vacation season often finds investors preoccupied with beaches, golf courses, and family trips. Occasionally, however, August demands more attention than vacation-minded investors are willing to provide. In the last 68 years, the S&P 500 has ended August higher 38 times. A few major losses in August, however, prompt investors to view the month with trepidation. Since 1949, August has produced an average 0.14% loss, but merely taking out the 14.58% drop in 1998 changes the August average result to a positive 0.8%. Minus the next two major losses (1990 -9.43% and 1974 -9.03%), the average August result moves up to 0.36%.