Market Recap 8/25/2023

It’s that time of the year again when all eyes in the investment world turn to Wyoming.  Yea, I know, weird, right?   But every year the Fed has a get-together in Jackson Hole to talk about, well, Fed stuff.  A number of years ago they mused on using quantitative easing as a tool to manage the economy and financial markets.  And lo and behold, quantitative easing was soon ubiquitous around the world.  Last year Chairman Powell made the headlines when he said he was committed to battling inflation.  I know, not a real shocker, but there isn’t much going on in the markets during the dog days of August.


Well, Powell’s comments this year were a touch tamer.   Basically, he said the Fed is prepared to raise interest rates further if inflation isn’t on a convincing path towards the 2% goal.  And if it is, he won’t.  Not exactly groundbreaking.  But the Fed is probably searching for a way to get themselves out of something of a predicament.  They have been publishing a chart like the one below for some time now.  



This is the Fed’s so-called dot-plot.  It shows where the committee members see rates settling out in 2024, 2025, and beyond.   As you can see, most board members think the Fed Funds rate will average roughly 2.5% over the long run.   Some call this the terminal rate where monetary policy is neither restrictive nor expansionary.  Another term is economic geekery – it’s called the R*.   


But is this the right number?  Many think not.  Today’s Fed Funds rate is well over 5% and growth looks ok.  After all, the Atlanta Fed’s guess for third quarter growth is running close to +6%.



A Fed Funds rate of 2.5% might have been neutral post Global Financial Crisis (GFC), but is that still the case today when fiscal spending is running as hot as it is?


The Fed’s quandary is how to guide this long-term rate higher if the fundamentals of the economy have truly changed.  Some thought Powell might attempt such a balancing act today, but it wasn’t to be.  


The bond market isn’t waiting around, though.  After all, both 10-year and 2-year yields have hit multi-year highs lately.



And the rise in yields isn’t due to worries about inflation.  All of the increase in rates is due to the so-called real yield, as you can see below.


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This is the yield you earn on a 10-year Treasury Inflation Protected bond.  There are a number of factors that can drive real yields higher.  The downgrade probably didn’t help.  The fiscal backdrop is certainly playing a part.   But so is the fact that investors are betting that a neutral Fed Funds rate isn’t 2.5% in today’s world.  It’s likely something higher.


But in the grand scheme of things, we are getting back to the state of the world before the financial crisis.  Pre-2008 real yields were consistently over 2%.  


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Looked at this way, maybe the post GFC period is really the aberration, not what’s happened with rates recently.  


(Other) Charts We Found Interesting


  1. Rising real yields is filtering through into mortgage rates.   They hit their highest level since 2001 this week.



  1. As you would expect, mortgage activity is grinding to a halt.  



  1. People are also borrowing less from their brokerage accounts. 



  1. This chart is a bit complex, but basically it tells you that a huge percentage of daily trading volume comes from something other than people or institutions buying stocks as a long-term investment.  



  1. Timing the market is hard.  A recent Morningstar study tried to quantify how hard.


‘Our annual study of dollar-weighted returns (also known as investor returns) finds investors earned about 6% per year on the average dollar they invested in mutual funds and exchange-traded funds over the trailing 10 years ended Dec. 31, 2022. This is about 1.7 percentage points less than the total returns their fund investments generated over the same period. This shortfall, or gap, stems from poorly timed purchases and sales of fund shares, which cost investors roughly one fifth the return they would have earned if they had simply bought and held.’



  1. China no longer reports youth unemployment numbers.  Probably safe to say the data is moving in the wrong direction.



  1. There’s always a bull market somewhere.  The country is awash with breweries.



Have a good weekend


Charles Blankley
Chief Investment Officer
Gemmer Asset Management LLC


Published by Gemmer Asset Management LLC. The material presented (including all charts, graphs and statistics) is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The material is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objective, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this material is suitable for their particular circumstances and, if appropriate, see professional advice, including tax advice. The price and value of investments referred to in this material and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or prices of, or income derive from, certain investments. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Gemmer Asset Management LLC (GAM). Any mutual fund performance presented in this material are used to illustrate opportunities within a diversified portfolio and do not represent the only mutual funds used in actual client portfolios. Any allocation models or statistics in this material are subject to change. GAM may change the funds utilized and/or the percentage weightings due to various circumstances. Please contact GAM, your advisor or financial representative for current inflation on allocation, account minimums and fees. Any major market indexes that are presented are unmanaged indexes or index-based mutual funds commonly used to measure the performance of the US and global stock/bond markets. These indexes have not necessarily been selected to represent an appropriate benchmark for the investment or model portfolio performance, but rather is disclosed to allow for comparison to that of well known, widely recognized indexes. The volatility of all indexes may be materially different from that of client portfolios. This material is presented for informational purposes. We maintain a list of all recommendations made in our allocation models for at least the previous 12 months. If you would like a complete listing of previous and current recommendations, please contact our office.

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