Central Florida Chapter - cfgfoa.org Presentation Sep 27 … · Inflation Source: Bloomberg. See...

Central Florida Chapter

John F. Grady III, CTPManaging Director

Public Trust Advisors 2019 ©

The Economy

2


U.S. Gross Domestic Product

Source: Bloomberg. See additional footnotes at the end of the presentation.

GDP for the 2nd quarter of 2019 was supported by the largest personal consumption (3.03%) since December 2017 (3.10%) and second largest contribution in more than five years. Net exports were a drag during the quarter and investments were flat following three quarters of positive growth.

3


Gross Domestic Product


The second reading of 2.00% for the 2nd Quarter 2019 GDP confirmed the U.S. consumer continues to support a growing economy, for now. Conversely, GDP for China and the Eurozone have been trending lower for the last few quarters with Germany posting a -0.1% for 2nd quarter 2019.

4




The second reading of 2.00% for the 2nd Quarter 2019 GDP confirmed the U.S. consumer continues to support a growing economy, for now. Conversely, GDP for China and the Eurozone have been trending lower for the last few quarters.

5




The largest economies in the Eurozone have been trending lower for the last few quarters with Germany posting a 0.0% for 2nd quarter 2019.

6


Labor Markets


Monthly job growth has slowed in the first half of 2018 compared with all of 2019.

7

Avg. 2018 – 223K month

Avg. 2019 – 158K month


Labor Markets


Wage growth picked up during 2018 and into 2019 to levels not seen in a decade.

8


Labor Markets


There are currently more than 7 million job openings.

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Labor Markets


The U.S. unemployment rate remains near 50 year lows at 3.70% in August.

10


Labor Markets


More than twice as many workers are quitting as compared to workers being laid off.

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Labor Markets


Improved labor markets have also resulted in continued declines in the number of workers employed part time for economic reasons.

12


Inflation


Inflation has remained persistently low although is trending near the Fed’s target.

13


Inflation


Inflation has remained persistently low although is trending near the Fed’s target.

14

Dec-150.20%

2.80% 2.30%2.10%

2.40%2.10%

(4.00%)

(2.00%)

0.00%

2.00%

4.00%

6.00%

Jun 15 Jun 16 Jun 17 Jun 18 Jun 19

Year

ove

r Ye

ar G

row

th

Producer Price Index and Consumer Price IndexLess Food and Energy (Year over Year Change)

PPI YOY Less Food and Energy CPI YOY Less Food and Energy


The Consumer


Retail sales growth remains steady.

15

Aug-080.20%

(11.50%)

Aug-194.10%

(15.00%)

(10.00%)

(5.00%)

0.00%

5.00%

10.00%

Dec 05 Nov 07 Oct 09 Sep 11 Aug 13 Jul 15 Jun 17 May 19

Retail Sales


The Consumer


Auto sales remain strong.

16


The Consumer


Confidence dipped in August as concerns of the U.S. – China trade war weigh on consumers future expectations.

17


The Yield Curve

18


Federal Funds Rate Hike Current Cycle


The FOMC is likely to cut the overnight rate during the upcoming July 30-31 meeting. This would be the first rate cut since the Great Recession.

19




The first 36 months of the current rate hike cycle has nine 0.25% increases compared to the 2004-2006 cycle which had 17 0.25% in the same time frame.




The Federal Funds rate has experienced a significant downward trend since peaking in May of 1981.


Yields for maturities longer than one year plummeted in November and December, although they have rebounded in the first few weeks of January.


The Yield Curve Inverted in December


Federal Funds Rate is Higher than U.S Treasuries 10yrs and Less


The Federal Funds rates is now 0.50% higher than the 10 year U.S. Treasury Bond yield.

23

2.34% 1.99%

2.97%

1.65%

3.09%

1.55%

3.24%

1.75%2.25%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

Nov 18 Jan 19 Mar 19 May 19 Jul 19

Yiel

d

U.S. Treasury Yield Comparison3M/2YR/5YR

3M UST 2Yr UST 5Yr UST 10Yr UST Fed Funds


FOMC Rate Projections – July 2019


24

As of early July, the market has priced in a 100% chance of a rate cut during July 30-31 FOMC meeting. Also, there is currently a 60% chance of up to four rate hikes in the next 12 months.


FOMC Rate Projections – August 2019


25

As of mid August, the market has priced in a 100% chance of a rate cut during September 17-18 FOMC meeting. Also, there is currently a 76% chance of up to six rate hikes in the next 12 months.


FOMC Rate Projections – September 2019


26

Following September FOMC meeting that resulted in the 2nd Fed Funds rate cut, the market has priced in a 55.8% chance of a rate cut during October FOMC meeting. Also, there is currently a 68% chance of up to four ate hikes in the next six months.


Federal Funds Futures


Federal Funds Futures contracts provide an indication on market expectations of the Federal Funds rate based on current available information.


Yield Curve November 2018 vs. August 2019


28

Interest rates continued to decline in the second quarter of 2019 with rates falling more than a full percentage point since November 2018 for maturities greater than two years.


Forward Yield Curves – July 2019

Forward yield curves also project several rate Federal Funds rate cuts during the next 12 months.

Source: Bloomberg ICE Index information See additional disclosures

29


Forward Yield Curves – August 2019

Forward yield curves also project several rate Federal Funds rate cuts during the next 12 months.


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Forward Yield Curves – August 2018

Forward Curves were completely wrong in projecting interest rates in 2019.


31


Investment Strategy Considerations


Considerations for Investment Strategies

*Not a recommendation. All investments have a risk of loss. Only invest in permitted investments according to all applicable laws and as permitted by investment policy.

Market Timing: Shifting investment strategies may result in loss of interest income, increase in market risk volatility, or both.

Multiple Duration Strategies: Utilizing short and longer term maturity strategies may provide reduced overall risk during several interest rate cycles.

Liquidity options including DDA, LGIP, MMF, CP, Discount Notes*

Maturities between one and five years for reserves*

Consider Investment Risks: All investments have risks

Reinvestment Rate Risk

Market Risk (Interest Rate Risk)

Liquidity Risk


Considerations for Investment Strategies - Active


Active vs. Passive Investing: Portfolios may be managed with a buy and hold strategy (passive) or an active strategy that maintains a defined target duration.

Both may use a laddered or barbell maturity structure.

Active strategy reported on a total return basis.

Active strategy performance is measured against a designated benchmark

Duration typically stays within 10% - 20% of benchmark duration.

Active strategy realizes gains and losses from trading activity.

In a pure active strategy realized losses may not be made up from reinvestment.

Active strategy seeks to benefit from changes in market conditions while maintaining duration and asset allocation parameters.


Considerations for Investment Strategies - Passive


Active vs. Passive Investing: Portfolios may be managed with a buy and hold strategy (passive) or an active strategy that maintains a defined target duration.

Both may use a laddered or barbell maturity structure.

Passive strategy reported on a yield to maturity basis.

Passive strategy may be compared to a yield on a security with a similar duration (2 year avg. maturity compared to a 2 year U.S. Treasury yield.

Passive strategy duration not as defined as active strategy.

There are no realized gains or losses since securities are not sold prior to maturity.

Does not utilize changing market conditions (yield curves, spreads etc.) as part of strategy – reinvestments are based on existing market conditions.


Bond Swap Transactions and the Yield Curve


36

An historical look at yields during the last FOMC rate cut cycle.

0.51%0.65%

0.90%

1.31%

1.65%1.90%

2.11%3 Month1.81%

6 Month1.88%

1 Year1.87%

2 Year1.69%

3 Year1.62%

4 Year1.61%

5 Year1.61%

0.00%

1.00%

2.00%

3.00%

3 Month 6 Month 1 Year 2 Year 3 Year 4 Year 5 Year

Yiel

d

US Treasury Yields3 Months - 5 Years Maturity

December 16, 2016 September 27, 2019




37

Positive slope yield curve.




38

An inverted yield curve.

3 Month1.81%

6 Month1.88%

1 Year1.87%

2 Year1.69% 3 Year

1.62%4 Year1.61%

5 Year1.61%

1.25%

1.50%

1.75%

2.00%


Yiel

d


September 27, 2019


Yield To Maturity is a bond’s internal rate of return based on the bond’s projected cash flows, and price.

Assumes all coupon payments are reinvested at the YTM.

Yield to Maturity is Forward Looking – Expected Earnings based on Price and Coupon

Book Yield to Maturity and Market Yield to Maturity

Book Yield reflects the Yield on the Book Value

Total return is the return of the bond (or portfolio) since settlement. This includes income earned,

realized gains and losses and the change in market value.

Total Return calculates what has been earned for a Period of Time

Includes Unrealized Gains and Losses

Total Return Reflects the difference in the Market Value vs. Book Value

Yield to Maturity vs. Total Return

TR YTM




40

An inverted yield curve.


Short Term/Liquidity Strategies


Bank Balance Analysis

Source: Sample Analysis. Not an investment recommendation. For illustration only. See additional footnotes at end of presentation.








Maintaining a Long Term Strategy with Flexibility


Yield Curve January 2006 - November 2008


46


4.37% 4.47% 4.49% 4.34% 4.31% 4.32% 4.28%

4.95% 5.01% 5.13% 4.96% 5.02% 5.05% 5.06%

0.01%

0.89% 1.07% 1.19%1.53% 1.70%

2.37%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%


Yiel

d


Jan 20 06 Mar 02 07 Jul 06 07 Nov 14 08


Yield Curve November 2018 – September 2019


47


0.25% 0.32% 0.49%

0.62% 0.75% 0.88% 1.01%

2.33%2.50%

2.72%2.96% 3.02% 3.03% 3.05%

1.81% 1.88% 1.87%1.69% 1.62% 1.61% 1.61%

0.00%

1.00%

2.00%

3.00%

4.00%


Yiel

d


Jul 01 16 Nov 09 18 Sep 27 19


Historical Performance – 10 Years (Risk/Reward)

Historically, longer term indexes have provided higher returns through multiple interest rate cycles, although with higher volatility.


48


Total Return: Income Return and Price Return

Source: Bloomberg ICE Index information See additional disclosures49


This presentation is for informational purposes only. All information is assumed to be correct but the accuracy has not been confirmed and therefore is not guaranteed to be correct. Information is obtained from third party sources that may or may not be verified. The information presented should not be used in making any investment decisions and is not a recommendation to buy, sell, implement or change any securities or investmentstrategy, function or process. Any financial and/or investment decision should be made only after considerable research, consideration and involvement with an experienced professional engaged for the specific purpose. All comments and discussion presented are purely based on opinion and assumptions, not fact, and these assumptions may or may not be correct based on foreseen and unforeseen events. All calculations and results presented and are for discussion purposes only and should not be used for making calculations and/or decisions. The data in this presentation is unaudited.

Performance comparisons will be affected by changes in interest rates. Investment returns fluctuate due to changes in marketconditions. Investment involves risk, including the possible loss of principal. The information contained herein has been obtained from sources thatwe believe to be reliable but its accuracy and completeness are not guaranteed. There is no guarantee that investment strategies will achieve the desired results under all market conditions, and each investor should evaluate its ability to invest long-term, especially during periods of a market downturn. Past performance is not an indicator of future performance or results. Any financial and/or investment decision may incur losses. The materials in the attached are opinions of Public Trust Advisors, LLC and should not be construed as investment advice.

The investment advisor providing these services is Public Trust Advisors, LLC, an investment adviser registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940, as amended. Registration with the SEC does not imply a certain level of skill or training. Public Trust is required to maintain a written disclosure brochure of our background and business experience. If you would like to receive a copy of our current disclosure brochure, privacy policy, or code of ethics please contact us.

Benchmarks are provided for illustrative purposes only. Comparisons to benchmarks have limitations because benchmarks have volatility and other material characteristics that may differ from the portfolio. Also, performance results for benchmarks do not reflect payment of investment management/incentive fees and other fund expenses. Because of these differences, benchmarks should not be relied upon as an accurate measure of comparison.

Disclosures

50

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Central Florida Chapter - cfgfoa.org Presentation Sep 27 … · Inflation Source: Bloomberg. See...

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