Fed leaves key policy rate unchanged, plus the great wealth transfer, no stress in credit, and Dallas TX
The Sandbox Daily (9.20.2023)
Welcome, Sandbox friends.
Today’s Daily discusses:
Fed holds key policy rate steady
upcoming wealth transfer
no stress in bond land
speaking engagement in Dallas, TX
Currently coming at your inbox from 30,000 feet over Arkanas - with crazy latency - let’s dig in.
Markets in review
EQUITIES: Dow -0.22% | Russell 2000 -0.90% | S&P 500 -0.94% | Nasdaq 100 -1.46%
FIXED INCOME: Barclays Agg Bond -0.05% | High Yield -0.08% | 2yr UST 5.172% | 10yr UST 4.399%
COMMODITIES: Brent Crude -1.23% to $93.18/barrel. Gold -0.12% to $1,951.3/oz.
BITCOIN: +0.29% to $27,235
US DOLLAR INDEX: +0.18% to 105.351
CBOE EQUITY PUT/CALL RATIO: 0.76
VIX: +7.30% to 15.14
Quote of the day
“You should write your obituary and figure out how to live up to it.”
- Warren Buffett, Berkshire Hathaway
Fed holds key policy rate steady
To no one’s surprise, the Federal Reserve maintained its key policy rate at 5.25-5.50%, leaving the benchmark interest rate unchanged while signaling borrowing costs will likely stay higher for longer.
Updated quarterly projections showed 12 of the 19 committee officials favored another 0.25% rate hike in 2023, as the FOMC continues trying to determine “the extent to which additional policy firming that may be appropriate.”
Per the updated Dot Plot, the average Fed forecast continues to see one additional rate hike in 2023 with a median year-end forecast of 5.6%.
Notably, as the Summary of Economic Projections chart from the Fed below shows, there are 2 fewer rate cuts built into the Fed’s projection for their 2024 year-end forecast, which sees the Fed Funds Rate at 5.1%, up from 4.6% in the last statement from June.
In simple terms, Fed officials see less policy easing next year.
Another hawkish tilt from the today’s meeting came when Fed Chair Jerome Powell said a “soft landing” is not the Fed’s baseline expectation for the U.S. economy, but it is the primary objective as it seeks to contain inflation.
After a historically rapid tightening pace that took the Federal Funds Rate from nearly zero in March 2022 to above 5% in May of this year, the central bank has in recent months pivoted to a slower pace of increases.
Bottom line: the Fed remains data dependent, Fed Chair Powell stayed on message and consistent with recent speeches, the updated rate path for 2024 was incrementally hawkish, and we should heavily discount any economic forecast that is more than 3-6 months into the future (the Fed has been behind the curve for 2+ years).
Source: Federal Reserve, Summary of Economic Projections, Ned Davis Research, Bloomberg
Upcoming wealth transfer
As the Baby Boomers approach their twilight years – whose average age is 67.1 with birth years ranging from 1946 to 1964 – many are curious to watch the largest transfer of wealth in modern times.
Beneficiaries, namely Millennials, are set to inherit $68T over the next 20 years.
Source: FS Insight, Coldwell Banker
No stress in credit
When markets are under stress, it shows up in credit spreads.
Despite surging yields since the summer and endless debates about the debt load in the system, we are not seeing stress in bond land. To the bulls credit, junk yields have been largely tame and haven’t widened out.
Here is a ratio chart of the High Yield Corporate Bond ETF (IEF) and the U.S. Treasury 3-7 Year Bond ETF (IEI):
When the HYG/IEI ratio is falling (and credit spreads are widening), stocks tend to come under increased selling pressure. Given the recent weakness in equity markets, one would expect to see a decline in the HYG/IEI ratio.
But credit spreads aren’t expanding – if fact, it’s quite the opposite. Spreads are getting tighter – HY credit is rallying on a relative basis against safe Treasury bonds – a clear sign of a healthy market, for now.
What about the ICE BofA MOVE Index, which broadly tracks fixed income market volatility?
The VIX-equivalent measure for the bond market is breaking down to new 52-week lows.
Source: All Star Charts
Speaking engagement in Dallas, TX
The Private Wealth Management Summit, presented by Marcus Evans, is a premium conference bringing together leading private wealth management advisors, fund managers, and consultants.
With over 300 attendees across many segments of our industry, it was fascinating to discuss a vast array of ideas and strategies relevant to today’s landscape.
I was grateful for the opportunity to speak and share my own perspectives.
Source: Marcus Evans Private Wealth Management Summit
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.