Market Perspective 6/12/2020
The dual mandate of the U.S. Federal Reserve (Fed) is to maximize employment and promote stable prices, or stated another way, control inflation. The Fed met this week, and as expected, they left short term interest rates unchanged at a range of 0-0.25%. By keeping interest rates low or near zero, the Fed is attempting to spur economic growth. Lowering interest rates is seen by economists as a form of stimulus because it can increase the amount of money in the economy.
Low-interest rates can, and do, impact market participants’ (i.e., institutional and retail investors) behavior like when the interest earned on low-risk investments such as savings accounts feels insufficient. If the rates on safe investments are low, it can encourage investors to seek out higher-risk investments in an attempt to obtain higher yields.
For example, an investor might sell a low interest-paying money market fund to buy a dividend-paying stock. Remember that the total return of any investment is the combination of income received (interest & dividends) and principal price changes. A low-interest-rate environment can lead investors down a path of taking on unintended risks.
Investing in yield-oriented investments for specific segments of a portfolio can be valuable; however, we would not advocate relying only on income from higher-risk investments. Using instead a combination of principal and income from safer investments for the next few years’ cash needs, we believe, can create a more predictable income stream.
Market Comments
Stock market volatility increased this past week partly over concerns of additional waves of COVID-19 cases
The decline in stocks this week comes after three straight weeks of market increases
As noted above, short term interest rates are now less than one-quarter of one percent per year; a substantial decline from one year ago when it was just above two percent
Although rates are lower across the maturity spectrum, the yield curve has become steeper, meaning short term interest rates have fallen more than long term
Related to oil markets, OPEC and some non-OPEC countries agreed to extended oil production cuts through the end of July
The oil production cuts are designed to stabilize the supply/demand imbalance and corresponding oil prices, which several countries rely on for economic growth
Restaurant food delivery service Grubhub, Inc. agreed to be acquired by Just Eat Takeaway.com, a Netherlands-based food delivery business
Interestingly, the market value of Grubhub has increased by about 24% this year; demand from restaurants joining their platform combined with the economic shutdown has been a tailwind for the food delivery business model.
