The reason rates were elevated was to slow the economy down, bringing down inflation. That endeavor was successful, and now the Fed wants to give the economy a boost. How do they do this? They make money “cheaper” for the average American to attain by making interest rates less. Say a family gets a loan for a $300,000 home, with 20% down and 5.5% interest, using a mortgage calculator, we know they would have a $1,961 monthly payment. That same scenario but at 7% interest equals $2,157 per month. The 1.5% difference translates into $200 per month that the average consumer could put back into the economy.

Here is how the rate changes can affect consumers:

Lower borrowing costs:

• Mortgages: Interest rates on new mortgages and adjustable-rate mortgages should decrease, making homeownership more affordable or allowing homeowners to refinance into lower-rate loans.
• Auto loans: Interest rates on car loans should also decline, making new and used cars more affordable for those financing their purchase.
• Credit cards: Interest rates on credit card balances should drop, providing some relief to consumers carrying debt.
• Other consumer loans: Personal loans, student loans, and other forms of consumer credit may also become cheaper.
• Business loans: Lower interest rates on business loans could stimulate investment and economic growth.

Lower returns on savings:

• Savings accounts and CDs: Interest rates on savings accounts and certificates of deposit will likely decrease, reducing returns for savers.
• Money market accounts: Yields on money market accounts may also fall, affecting those seeking safe, short-term investments.

Potential impacts on consumer spending and the economy:

• Increased spending: Lower borrowing costs could encourage consumer spending on big-ticket items like homes and cars, potentially stimulating economic growth.
• Increased confidence: The rate cut may signal confidence in the economy, leading to improved consumer sentiment and further spending.
• Stock market impact: Lower interest rates could boost the stock market, potentially benefitting investors.

The actual impact of the rate cut will depend on a variety of factors, including the size of the cut, the overall economic outlook, and the response of financial institutions. It will take some time for the full effects of the rate cut to be felt in the economy, on average, nine to 12 months for rate effects even to take place, so changes will not be immediate. Contact your Fort Pitt Capital Group Financial Advisor to review when and how these changes could affect you and to ensure your investments are set up for success.

The post Fed Rate Cut: What Consumers Need to Know appeared first on Fort Pitt Capital Group.

Stock Market Before Election

Presidential elections happen every four years in the U.S., and leading up to election day, the stock market becomes more volatile. This volatility results from investor uncertainty regarding policy and regulation changes a new president can bring when they step into office.

The short-term performance of specific sectors can be unprecedented during this time, with some sectors having higher volatility than others. For instance, the healthcare industry’s stock market value can change drastically leading up to the election in anticipation of legislative change in healthcare policies. Another example is the energy sector, where changes in spending priorities dictated by the stance of the parties can increase volatility.

The election polls can also have an impact on stock markets. The market typically performs poorly when candidates tie in major polls, as this causes investor uncertainty.

Stock Market Election Predictions

Despite an individual’s political views, the odds are high that the stock markets have already priced in what will happen. This is because the stock market is a forward-looking instrument, meaning that prices will reflect investor predictions.

The stock market has accurately depicted who will win in 87% of elections since 1928. Data shows that the probability of the incumbent party losing is high if the stock market drops before the election. If the stock market value rises, there may be a higher probability of the incumbent parting winning.

Stock Market After Election

The stock market reacts differently depending on the type of election and which party wins. It also changes throughout the duration of the president’s full term.

The Stock Market and the 4-Year Presidential Cycle

During the four-year presidential term, the stock market seems to follow a predictable trend, which leads to the creation of the “presidential election cycle theory.” This theory states that the stock market is weak in the first half of the presidential cycle and high in the second half, particularly in the third year.

While the research to support the dip in the first half is inconclusive, the Standard and Poor’s 500 (S&P 500) — which shows the stock performance of the 500 leading companies in the U.S. — has historically shown an average gain of about 16.3% in the third year of the presidential cycle. The president will typically try to drive the market up closer to the end of their term to increase the chance of re-election, which may be a reason for the third-year gains. There are exceptions to this theory, and the data from the limited number of election cycles may not be enough to predict future patterns.

The Effect of the Winning Presidential Party

Research shows that the winning party has a minimal effect on the stock market in the long run. However, there are some cases in which there is a slight impact, especially in the months following election wins.

Generally, the stock market after elections increases more when a Republican candidate wins. However, the market has performed significantly better under Democrat presidents during their full term in office.

The market also has a brief positive reaction when the incumbent party is re-elected, especially when they’re a Democrat party.

Stock Market After Midterm Election

Midterm elections happen two years into a president’s four-year term and determine the control of the U.S. Senate and House of Representatives. Historically, the stock market performs negatively leading up to midterm elections, but recovers quickly after them. Stock market performance after midterm elections is higher than usual, with an average return of 16% for those years.

Like the presidential party, midterm election results don’t greatly impact the stock market. People may think that it’s better when one party controls both the White House and Congress, but data from past elections shows that the market performs slightly better when the Democrat party controls the White House and the Republican party controls the Congress either fully or split.

Regardless of volatility leading up to elections and the slight impact of the winning party, the stock market during election years has been favorable overall. Looking at data since 1928, 20 out of the total election years had positive returns with an average return rate of 11.58%. The stock markets posted negative returns only four times.

Investment Strategies for Elections

It’s important to remember that elections have little impact on the stock market’s overall performance over a long period of time. This is because fluctuations in returns caused by election periods even out the longer your investment period is. Despite the volatility leading up to elections and who’s in office after them, the stock market continues to provide returns year on year. Historical data from the S&P 500 index supports this notion, as it shows an average annual return rate of about 10.3% since 1957.

Rather than worrying too much about the elections, keep an eye on other factors that have a greater impact on the stock market. These include interest rates, inflation, geopolitical conflicts, and the state of the economy.

If you’re investing in the stock market, it’s essential that you:

• Stay invested: Invest for the long term in the stock markets to ensure the realization of the compounding effect of interest.
• Be consistent: The dollar cost average over time — investing set amounts at regular intervals — is better when investing in stock markets.
• Run a diversified portfolio: A diversified portfolio among sectors is one of the surest ways to insulate yourself from increased volatility.

Manage Your Wealth Through Fort Pitt Capital Group

Election time can bring uncertainty and stock market volatility, so your investments must be in the right hands. Fort Pitt Capital Group has a team of financial advisors with decades of experience in wealth management, financial planning, and investment analysis.

We’re dedicated to creating individualized investment strategies that meet your goals. Our team is always ahead of market changes, and we design our investment portfolios to mitigate the amount of loss during market decline. Through it all, we provide clear, transparent communication so you know exactly what’s happening with your investments.

Get started today by viewing our services for both individuals and businesses. When you’re ready, fill out our online form to schedule a free consultation.

The post Stock Market and Presidential Elections appeared first on Fort Pitt Capital Group.

 Stocks ended 2023 on a high note, with the S&P 500 Index advancing by 11.7% in the fourth quarter, closing the year with a 26.3% return and within striking distance of all-time highs. The powerful rally could be attributed to continued disinflation traction, increased credibility of the soft economic landing narrative, and a surprisingly dovish pivot from the Federal Reserve, which sent bond yields plummeting. In stark contrast to the prior three quarters, returns were much more evenly distributed across equity market sectors and capitalization. Or, more succinctly, it wasn’t just the mega-cap tech stocks that performed well this quarter.

 Bond markets were rattled in the third quarter as excessive government borrowing left investors wondering how high bond yields would have to go in order to absorb the additional supply. The drubbing left most fixed income indices in negative territory for the year as of the end of September. However, that changed dramatically in the final months of 2023 as economic readings gave investors confidence that the Federal Reserve has inflation on the run, and the Fed’s December Summary of Economic Projections suggested three interest rate cuts in 2024. These developments helped to bring interest rates/bond yields down dramatically and propelled fixed income returns firmly into positive territory for the year.

Looking back to the beginning of the year, the consensus among economists and market pundits was that the Federal Reserve’s aggressive tightening cycle would push the economy into a recession. So far, those recession calls have been wrong. Not only have we not experienced a recession, but GDP growth was slightly above long-term trend levels in 2023. The best explanation for the economic and financial market resiliency is how well-prepared consumers and larger corporations were for a higher interest rate environment. Smart borrowers used the historically low-interest rate environment in the first half of 2020 to restructure and refinance their balance sheets. According to real estate brokerage firm Redfin, roughly 80% of homeowners have a fixed-rate mortgage and almost two-thirds of those mortgages have interest rates below 4%. Unless homeowners have been forced to move or relocate, they have been well-insulated from the pain of 7%-8% mortgage rates. Large corporations raised massive amounts of capital in 2020 by issuing long-term bonds at rock-bottom interest rates. In fact, among S&P 500 nonfinancial firms, 92% of debt is fixed rate with a weighted average interest rate of only 3.2% and an average maturity of almost nine years. Obviously, the longer interest rates remain at elevated levels, the more consumers and companies will be impacted. But smart borrowing and refinancing activity in 2020 set the stage for better-than-expected outcomes in 2023.

Turning to 2024, the starting point feels much different than at this time last year. We enter the year with much more optimistic economic predictions and bullish investor sentiment. It’s now difficult to find an economist willing to predict a recession with the consensus view shifting to a soft economic landing and inflation returning to long-term trend levels. Bond markets are pricing in five or six interest rate cuts throughout the year. And equity analysts are penciling in double digits corporate earnings growth for 2024. While each consensus outcome is plausible in and of itself, we’re a bit more skeptical and don’t expect a perfect alignment of outcomes with optimistic expectations. And we’re reminded of the contrarian nature of equity markets – above-average returns often come after investor sentiment, positioning, and outlooks have been severely depressed. We don’t have this tailwind at our backs to kick off the year.

Our outlook for 2024 is for flattish returns for market cap-weighted indices such as the S&P 500 Index and better outcomes from more diversified strategies and portfolios. Concentrated leadership was a painfully evident trend in 2023. The “Magnificent Seven” (Apple, Microsoft, Google, Meta Platforms, Amazon, Nvidia, and Tesla) rebounded from a dismal showing in 2022 and accounted for roughly 85% of the return for the market cap weighted S&P 500 in 2023. However, the massive outperformance from these mega-cap technology stocks has pushed the S&P into concentrated territory, with the top 10 weighted stocks now accounting for one-third of the entire index. This concentrated positioning also represents a headwind from a valuation standpoint, with those top 10 stocks trading at a 45% premium to 25-year historical averages.

Looking forward, we see plenty of opportunities within areas and sectors investors have passed over as they continue to pile in and chase the mega-cap tech rally. Given the extremes in positioning, index weightings, and valuations of the “Magnificent Seven” versus everything else, we feel the rational expectation points to a shift in focus to some of the unloved sectors. And given our diversified exposure, we are much better positioned for a market environment with broader participation.

Fort Pitt Capital Group (FPCG) is an investment advisor registered with the United States Securities and Exchange Commission (“SEC”). For a detailed discussion of FPCG and its services and fees, see the Form ADV Part 1 and 2A on file with the SEC at www.adviserinfo.sec.gov. Registration with the SEC does not imply any level of skill or training. You may also visit our website at www.orchid-ibex-388317.hostingersite.com.

Any opinions expressed are opinions held at the time of publishing and are subject to change. It does not constitute an offer, solicitation, or recommendation to purchase any security. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Past performance does not guarantee future results. The performance shown is for illustrative purposes only and the intent is to show the performance of certain segments of the markets. This information is not reflective of the performance of any FPCG client, or the impact of security selection on actual client portfolios. Actual results and developments may be substantially different from the expectations described in the forward-looking statements included herein.

The S&P 500 is a broad-based index of 500 stocks, which is widely recognized as representative of the equity market in general. The Bloomberg U.S. Aggregate Bond Index is a broad-based index of intermediate term investment grade bonds traded in the U.S. These indices are unmanaged and may represent a more diversified list of securities than those recommended by FPCG. In addition, FPCG may invest in securities outside of those represented in the indices. The performance of an index assumes no taxes, transaction costs, management fees or other expenses. Additional information on any index is available upon request.

Copyright 2024 by Fort Pitt Capital Group LLC.  All rights reserved.

The post 4th 2023 Quarter Market Commentary appeared first on Fort Pitt Capital Group.

With the broad market (S&P 500 Index) down roughly 16% year-to-date as of Tuesday’s close, some of the reset process has taken place. Markets are in the process of adapting to the new reality where market liquidity and ultra-easy monetary policy are not the dominant drivers of stock market returns. Going forward, we expect fundamentals to matter a lot more than they have over the past decade.

As patient, long-term investors, we don’t proclaim to possess the ability to call market tops or bottoms. But with sentiment so negative, we feel there are a few positives worth mentioning. First, investor sentiment is so negative, which has historically served as a good contrarian indicator. In fact, sentiment readings are down to the abysmal levels that have historically signaled inflection points prior to market turnarounds. We were concerned with the euphoric investor attitudes and behavior last summer when SPACs, unprofitable tech IPOs, cryptocurrency, and non-fungible tokens were at the center of every investment conversation. That speculative froth has evaporated. Many of the hyper-growth pandemic darling stocks that soared in 2021 have plummeted by 60%-80% this year. Half of the stocks in Nasdaq Index are down more than 50% from their 52-week highs. We could outline a dozen other examples, but there are strong signs that investor attitudes have shifted from greed to fear.

Stocks have gotten cheaper. The broad market is now trading at a discount to the 5-year average valuation multiple and only slightly above the 10-year average. Looking under the hood, we see plenty of individual stocks we would categorize as being downright cheap. While valuation alone hasn’t been an extremely effective tool for identifying market bottoms, we do think it is an important determinant of future equity market returns.

The market is struggling with a range of near-term challenges. We put inflation firmly at the top of the list. Inflation remains in the driver’s seat and will dictate how aggressive the Fed needs to be in their path to normalizing interest rates. This path is likely to be the dominant driver of outcomes for both the economy and financial markets. The recently released April inflation report showed the first slight deceleration in monthly inflation readings in seven months. And we are now at the point where year-over-year inflation comparisons become more normalized. Going forward, the math makes it tougher for inflation to remain at such elevated levels. We haven’t seen enough evidence to call a definitive inflation peak but some small indications that we’re heading in that direction is a welcomed sign.

Sincerely,
Dan Eye
Chief Investment Officer
Fort Pitt Capital Group LLC
1-800-471-5827
Contact Us

Fort Pitt Capital Group, LLC is an SEC registered investment advisor registered. For more information, please visit www.orchid-ibex-388317.hostingersite.com to request a copy of Form ADV. Registration with the SEC does not imply any particular level of skill or training.

The post Market Update May 11, 2022 appeared first on Fort Pitt Capital Group.

Money Supply

As we are all well aware, 2020 was consequential year for all of us. What begun as one of the strongest U.S. economies in history, quickly turned negative towards the end of the first quarter as the  reality of the Covid-19 virus took hold.

Unlike the previous economic collapse of 2008-2010, the Federal Reserve learned that massive, early intervention was needed to establish an orderly market to buy and sell fixed income products in the trading universe. As the slide shows, the amount injected into the system was far and above what was done during the financial crisis. In fact, the $3.25 trillion was more than 2.5X the $1.4 trillion done in 2008-2010.

Investment Grade Pricing & Liquidity

To illustrate the magnitude of the damage done to even the highest-grade corporate bond market, slide two shows how bad liquidity was during the early stages of the pandemic.

We can see that 2020 began with a sharp rise in performance and then fell off a cliff in March. Similar to 2008-2010, the fixed income market froze up as investors had a large flight to quality in cash and/or U.S. Treasuries.

Then, after the previously mentioned Fed intervention, they were able to re-establish an orderly trading arena for most bonds across the credit spectrum. Again, the Fed saved the day.

Treasury Yield Curve

Due to the aforementioned flight to quality, the yield curve shifted dramatically downward from what was already a depressed yield curve.

The short-end finished the year hovering around 0% while the longer end 30-year couldn’t break the 1% mark. Can you imagine lending someone money for 30-years and getting less than 1% on your 3-decade investment? I can’t but clearly, it is happening.

Although this is a great deal for the lending entity such as banks and the government as well as people wanting to refinance debt, the savers of the world were left with little return for their commitments.

Velocity of Money

As the above illustration shows, although there has been an enormous amount of money pumped into the system, much of it is not yet being passed around.

This shows a couple of points, first many individuals, as well as corporations, are sitting on cash in fear of another shoe to drop, but it also shows that with vaccines right around the corner, we can see a large increase of money exchanging hands in 2021.

Of course, this is positive news but with it comes a caveat of the possibility of increased inflation. Given the lack of any inflation in the last decade or so, this may be a welcomed sign in order to bring the yield curve back to a reasonable level.

It will be an interesting battle between the Fed, who has promised to keep rates low, and the market, who may demand higher rates to accommodate the perceived inflation in 2021.

Talk With an Advisor

Written by:

Jay Sommariva
Portfolio Management
Fort Pitt Capital Group, LLC
Foster Plaza 10, Suite 350 | 680 Andersen Drive | Pittsburgh, PA 15220
(412) 921-1822 | jsommariva@orchid-ibex-388317.hostingersite.com

The post 2020 Fixed Income Review & 2021 Outlook appeared first on Fort Pitt Capital Group.

Question:

Are you concerned that with the national debt that the value of our stocks could drop dramatically, and what can be done to safeguard such a drop?
*Response was given in January of 2021.

Response:

The bill for the COVID 19 response is going to have to be paid for by someone. The US national debt per working individual at the end of next year could be approaching $100,000. Thus far the financial authorities such as the federal reserve and the US Central Bank have decided to fund these debts with the newly printed money but at some point, the amount of money that is going to be required to fund these debts could become significantly inflationary.

So yes, I am concerned that the debt levels within the US economy, particularly public debt, could approach a level where we would have to really aggressively inflate the economy. At that point, we would start to see measures of inflation beginning to rise materially. It would be difficult for the central bank to be able to get control of inflation measures, which could double within a year or two. That could be a real problem for the central banks.

The debt is going to be an issue, but we’ve been able to “kick the can down the road,” so to speak, so far. As far as how individual clients might respond to the debt problem — The debt issue will have really become a problem for the markets if inflation becomes a policy to respond to it. A significant rise in inflation would be a possible outcome of the debt problem.

The way Fort Pitt Capital Group has chosen to respond with our portfolios is to steer the portfolios a little bit more towards cyclical businesses. This means business is that respond better with stronger economic growth ahead of any inflation. Cyclical businesses are companies like industrial businesses and materials companies. Companies that are responsive to a stronger economy should do better as a precursor to any inflation. And that’s exactly the way Fort Pitt Capital Group has positioned our individual securities portfolios.

Talk With an Advisor

Written by:
Charlie Smith
Fort Pitt Capital Group, LLC
Founding Partner & Chief Investment Officer
Email: csmith@orchid-ibex-388317.hostingersite.com 1-800-471-5827

The post National Debt And Stocks appeared first on Fort Pitt Capital Group.

The table below details first quarter performance for major U.S., international and global stock markets:

Volatility was not confined to the stock market. Investors flocked to the safe haven of U.S. Treasuries. This stampede, among other factors, drove Treasury bond yields down to record lows. In early March, the yield on a 10-year Treasury bond fell to 0.32%, with 30-year Treasury bond yields tumbling to 0.67%.

While the precipitous drop in interest rates benefited Treasury sector performance, the same cannot be said of other segments of fixed income. Both investment grade corporate bonds and high-quality municipal bonds (areas where we primarily focus) were sold indiscriminately in the first half of March. Anticipation of severe near-term economic weakness translated into credit concerns, and a broad-based “liquidity grab” exacerbated bond price declines.

The corporate and municipal bond markets recovered to a large degree in the back half of March, as the Federal Reserve stepped in aggressively with numerous policy actions. In a matter of weeks, the Federal Reserve slashed interest rates to zero, announced an “unlimited” quantitative easing program and reopened several emergency programs designed to boost liquidity and support financial markets.

The chart below details first quarter performance of several investment grade corporate and municipal bond indices. Both the mid-March stress and the month-end recovery are apparent.

Economic Update

Roughly 80% of Americans are under some form of restriction as the country looks to “flatten the curve” and prevent a spike in COVID-19 cases from overwhelming the healthcare system. No one needs an economics degree to understand that social distancing and shelter-in-place initiatives will have a profoundly negative impact on both the U.S. and global economy.

Recent economic data indicate that the U.S. economy likely entered recession late in the first quarter. Unemployment claims, auto sales, and manufacturing and services activity have been eye-poppingly bad. Still, consensus expectations are for the brunt of the economic decline to be felt in the second quarter.

The table below shows quarterly and full-year GDP estimates from a handful of investment banks as of March 23. We caution that with estimates evolving rapidly, some of these data may be stale by now:

While the short-term economic picture is quite sobering, we fully expect to see a robust recovery once the economy reopens for business. That said, the timing of both the COVID-19 peak and a return to normal for U.S. business remains uncertain. In the meantime, policymakers’ focus is on “bridging the gap” and steering us away from the worst-case scenarios.

The CARES Act, a massive $2.3 trillion stimulus plan enacted in late March, is the largest in U.S. history. It equates to about 11% of annual U.S. GDP. We expect this package to help cushion the blow of the economic shutdown by keeping small businesses afloat and getting cash into furloughed workers’ pockets. Congress has already begun conversations on the next round of stimulus.

A more detailed overview of the CARES Act is shown below:

Investment Views

We recognize that the unprecedented spike in volatility, huge daily market swings and bleak near-term economic picture are painful and hard to watch for investors. However, several important factors shape our forward-looking investment views. Some of those are detailed below.

Looking back over the last 11 U.S. recessions, the S&P 500 Index registered an average peak-to-trough decline of 33% in recessions defined as “severe”. The S&P 500 declined by roughly 34% from February 19th through March 23^rd. Given this decline, we believe a lot of bad news and negative outcomes have already been incorporated into stock prices.

Compared to other recessions, we believe we have a better roadmap for how this one ends. While we cast a skeptical eye on anything reported from China, observable data and commentary from U.S. business leaders operating in China suggest their economy is coming back online after being hit hard. The same can be said for South Korea, which took very aggressive (and intrusive) policy steps to contain the virus. We are also encouraged to see the “curve” start to plateau in some of the most heavily impacted countries in Europe, such as Italy and Spain. We believe these signs bolster the view that there is an “other side” to this period of economic stress.

As long-term investors, we need to remember this, and focus on a couple of extremely important points:

First – markets don’t wait! Equity markets are forward looking. They’ve historically bottomed well before whatever crisis caused the decline, and well before all the bad news is out. The charts below provide useful context on this point.

1970s stagflation crisis – The stock market did not wait for the unemployment rate to decline (or even peak!) before moving higher.

1989-90 S&L crisis – The financial sector did not wait for bank failures to stop before rebounding. Bank stocks bottomed years before bank failures peaked.

Financial crisis – Similar to the savings and loan crisis, bank stocks bottomed years before the last of the bank failures.

Additional examples are plentiful. Applying what we have learned from previous severe stock market declines leads us to conclude that markets aren’t going to wait until all the scary headlines stop, economic conditions improve, a vaccine is fully developed or the last COVID-19 patient recovers. Instead, the stock market prices in the risks, uncertainties and potential negative outcomes – often overshoots to the downside – and then moves on!

Below is a good illustration of the path various asset classes have followed during the “move on” phase in the previous four bear markets. That path has been decisively higher for risk assets. We recognize staying the course and sticking with a well-established investment plan can be uncomfortable during a bear market. But making dramatic portfolio changes or abandoning stocks after a severe market decline can literally wreck a lifetime of good planning.

Closing Thoughts

We will follow up shortly with some additional thoughts and market commentary. In the meantime, we’ll wrap up with the quote below. It’s a good one.

“What has so often excited wonder, is the great rapidity with which countries recover from a state of devastation, the disappearance in a short time, of all traces of mischief done by earthquakes, floods, hurricanes, and the ravages of war. An enemy lays waste a country by fire and sword, and destroys or carries away nearly all the moveable wealth existing in it: all the inhabitants are ruined, and yet in a few years after, everything is much as it was before.”

John Stuart Mill, Principles of Political Economy, 1848

The post Markets Don’t Wait appeared first on Fort Pitt Capital Group.

Recently, there has been what’s perceived to be a supply and demand issue occurring within this market. The repo market helps the 12 Federal Reserve Banks finance their overnight operations. This help comes from money market funds or pension accounts that have cash that needs to be invested overnight. Typically, these two sides work together and decide on a rate that’s around the overnight federal fund rate.

A more digestible way to explain this is that there’s one side of the equation that has treasuries that are sitting on their balance sheet, which are the 12 member banks. On the other hand, there are people with significant money that can purchase those on an overnight basis to fund the 12 banks. These are just one-night trades that reverse the next day.

During times of distress, such as the 2008 financial crisis, there were a few of these banks that needed overnight funding, but the other side of the equation wasn’t willing to lend money out to them. The current situation we’re in with the repo market doesn’t seem to indicate a repeat of what happened in 2008.

In 2008, Lehman Brothers didn’t have the financing to pay their bills or payroll, so they weren’t able to operate. They had most of their financing done overnight because it’s the cheapest way for banks to finance, and it all disappeared in an instant. The company went from getting billions of dollars in financing to nothing and went out of business.

What may be happening right now is that there are too many treasuries and not enough cash to support the repo of those treasuries. This could be attributed to the tax payments that have been paid by corporations in the past few weeks. When there’s a disconnect like this, the Federal Reserve realizes that the repo market won’t buy the bonds, so they’ll buy the bonds from the banks on an overnight basis until the situation goes back to normal.

From a fixed income standpoint, I’m watching to see if these overnight levels creep into the longer-term corporate bonds. And I’m waiting to see if the spreads are widening on these financial companies and if it’s impacting them as well. When this happened in 2008, not only did the repo market get expensive, they’d be willing to do anything to finance these bonds out to the curve. However, I don’t see the overnight level transferring into other issues because this seems to be a technical problem occurring within the system, not a systematic one.

Many investors are curious how long the issue will occur within the repo market. Considering the repo market has had these issues every day for over a week, it’s starting to feel as though there’s more to it than we’re seeing. But it’s also important to keep in mind that there’s a significant amount of money that has gone out for taxes in the last few weeks so it may take time for it to replenish.

If the repo market continues this path in the upcoming week or two, we may be able to see if it’s more than a supply and demand issue. If that’s the case, it may signify that there’s a specific bank having an issue. In that instance, the bank would need to either find a way to finance their overnight operations in a different manner or the federal government would have to come in and rescue them.

The post Why You Should Keep a Close Eye on the Repo Market appeared first on Fort Pitt Capital Group.

When it comes to investing in the stock market, there are a few things that investors should keep in mind if market volatility begins to make them worry.

• The market is always going to fluctuate. Even though most individuals are aware that they’re putting their money at risk when they invest, Fort Pitt advocates that investors make a collection of companies that work for them. Over a long period of time, this collection of companies should be able to outperform what interest you would earn from simply putting money into a savings account. We say this because you’re taking more risk and thus you should earn a higher reward.
• There’s no reason to be nervous when approaching an advisor about a dip in the market.  When the market is down, investors should talk to their advisor about the investments being made in their portfolio and seek reassurance. However, prior to approaching their advisor, investors should ask themselves what the fundamental reason is for them to be nervous. If the fluctuation is caused by anything outside of total economic collapse or society is going in the way of Mad Max, they’re most likely going to be okay.
• There’s no such thing as a recession proof portfolio. To help protect investors, our goal is to invest in a bucket of stocks that don’t go down quite as fast as others. Unless funds are needed in the immediate future, investors shouldn’t care if the market goes down because the market never stays the same and investments have to ride the waves of the market.
• Retirees should be prepared ahead of a recession. Although history has shown that recessions don’t last forever, it’s crucial for retirees to have enough money set aside so they aren’t forced to sell a good asset at a bad price just because they need money.
• Don’t play into the fear of the media. It’s common that the market will fluctuate as news develops. However, politics and midterm elections will most likely not cause a market crash. The market will always fluctuate, but that doesn’t signal the end of your investments.

It’s normal for investors to become worried during a tumultuous market. But it’s important to not let these worries distract you from your financial goals. Financial advisors are here to help keep you on track and educate you on your way to financial success.

The post Market Volatility Is Not as Spooky as it Sounds appeared first on Fort Pitt Capital Group.

Individual and corporate debt must be managed in a fiscally prudent manner or face devastating consequences for themselves and their companies. If individuals overextend themselves by racking up credit card debt or buying a house they can’t afford, there are mechanisms in place to rectify the situation by banks repossessing the collateral. Similarly, if corporations overextend their leverage, the bankruptcy lawyers can put the corporations out of business and sell off assets to recoup some of the losses. However, national debt is a whole different situation. In fact, I sometimes wonder why the word debt is used to describe loans from the U.S. government because the meaning is so different than what we consider to be traditional debt.

From a definition standpoint, national debt is similar to individual/corporate debt in that one party is borrowing money from another party and agrees to pay periodic interest throughout the term of the loan and then principal at maturity. This is where the similarities end. U.S. Treasuries, unlike other debt, never needs to be paid off. When the U.S. runs out of the ability to pay its current liabilities, they simply issue additional debt to pay off existing debt. There is no mechanism in place to repose or foreclose on government assets and the cost to borrow more debt stays relatively stable.

A more appropriate measure of national debt would be how the U.S. compares to other nations and what percentage of GDP their debt accounts for. According to the International Monetary Fund, global debt accumulated worldwide has exceeded $63 trillion. Although the U.S. is only a small portion of the land size and population of the world, we account for close to one-third of the worldwide debt with $20 trillion. Obviously, this is concerning but it may not be as bad as once thought.

For a perspective on what this means, we need to look at what percentage of GDP a nation’s debt accounts for. Since GDP represents the dollar value of all goods and services produced, it is a good measuring stick to gauge the overall health of an economy. The ratio used is a percentage of debt to GDP with 100 percent being equal to one year of GDP.

For example, as the graph below shows, current U.S. debt is approximately $20 trillion with the percent to GDP at 107 percent. Japan, at second place as far as dollars issued has $11.8 trillion but its percent to GDP is an astounding 239 percent. This is currently the highest debt to GDP ratio in the world and is the result of decades of mismanaged fiscal and monetary policy. Unfortunately, not only did Japan not stop their continued debt issuance, but they doubled down time after time with no real progress in improving the situation. Hopefully the U.S. policy makers can see the errors made by Japan and not follow the same path.

Right behind Japan in debt to GDP is Greece with $353 billion in debt but with a debt ratio of 182 percent of Greece’s GDP. Unlike the U.S. though, and to some extent Japan, Greece doesn’t have the economy to produce enough to lower their ratio. Greece has been in the news constantly the last few years for their inability to pay their debt and has had the E.U. to either forgive or “loan” them money to pay their debt. The ability for Greece to issue more debt on their own is non-existent.

What this all means is that although $20 trillion in debt is not optimal, the U.S. can still weather this because we have the ability to grow our economy and produce goods and services to honor our commitments. Lowering the outflows of fixed or variable cost is often not mentioned in D.C. but at some point, we will have to address this part of the income statement as well to make sure our debt service is not too high.

Sources: IMF, Visual Capitalist, Statista

The post Some Debt Is Not Like the Other appeared first on Fort Pitt Capital Group.