U.S. economic data continues to be mixed, and the Fed's minutes from the April meeting confirmed the market's consensus expectation that the Fed won't increase interest rates until September. Most recent data has confirmed this consensus view of the market. The economy is growing at a moderate pace, albeit an uneven growth led by employment. Jobless claims fell to a 15-year low last week, but average earnings have not expanded enough since the recession of 2008.
Consumer spending continues to be disappointing, as consumers focus continues to be on savings and paying down debt. The large decrease in energy prices in the last six months did not increase consumer's propensity to spend. The savings rate has continued to increase. Since falling negative in the mid 2000s, the savings rate has increased to almost 6% currently. This level is still below the long term average of 8%. Overall consumer debt levels have been falling, but not enough to make balance sheets look historically strong.
One of the interesting characteristics of the recent market is its low volatility in the equity market, which contrasts with high price volatility in the fixed income market. Fixed income volatility actually exceeds equity volatility over the past few months. This unusual paradigm -- where bond prices are more volatile than stocks -- has been caused by low trading volumes coupled with a questionable outlook for corporate earnings. Despite the earnings outlook, investors are staying in equities, as bonds appear over-valued given the pending Fed tightening, not to mention their low absolute yields. In the bond market, low trading volumes and reduced liquidity, to a certain extent due to regulation, have caused the opposite reaction, as volatility has gone up. I expect this environment to continue for the next few months, until we have clearer indications of the strength of the economy and the path of the Fed.
This blog post is for informational use only. The views expressed are those of the author(s), and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Any statements about financial and company performance of The Penn Mutual Life Insurance Company or its insurance subsidiaries (each, “Client”) made by the author is provided with a written consent from the Client. Penn Mutual Asset Management is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.