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  • Transcript

    Welcome to the Bryn Mawr Trust wealth management podcast, providing commentary on what’s moving the financial markets, financial planning, and other timely business and monetary topics. Please welcome today’s host, Ernie Cecilia, chief investment officer for BMT wealth management.


    Well, good morning and it’s great to be back and we’ll talk a little bit about the a recently completed second quarter of 2019 and what our thinking is, uh, looking ahead for the balance of the year from a economic and market perspective. The first thing that we want to want to cover a little bit is the fact that this economic expansion here in the u s is certainly, um, long. It’s now has full 10 years of age under its belt, so to speak. And I think at this point a fair question might be a, what’s the idea or what’s the thinking going forward? And, uh, we certainly know that a lot of the data that has been coming out from both domestically and globally point to some weakness, no question about that.

    It’s interesting. One of the sources that we use is the Atlanta Federal Reserve and their estimates for our gross domestic product. And which has been a forecast that’s been moving around certainly for the recently completed second quarter. And currently there a forecast is for an increase of plus 1.4% and that’s very, that’s come down from over 2% but it’s up from 1.3% as recently as July 3rd based on some better employment data for the month of June. Speaking up June data that came out on June 5th non-farm payrolls jumped 224,000 in a month, which is the highest edition since January and compares very favorably the 75,000 increase in the prior month, which, uh, really started to really affect thinking in terms of growth. The unemployment rate ticked up a little bit from 3.6% to 3.7% as more individuals jumped into the labor force. Some certainly that’s a positive. Wages increased a slow 0.2% but they are 3.1% increase over the past year.

    But you know, we would still note that wages are having a difficult time gaining any notable traction to the upside this year. In terms of the, uh, again staying on the growth side of the equation, the Federal Reserve sets quarterly sets its projections for real GDP growth for 2019. The forecast is plus 2.1% and for 2020 2%, in 2021, 1.8% so we’re kind of in that 2% real GDP glidepath if you will, Bryn Mawr, BMT wealth. We put together our own proprietary uh, US economy dashboard and we use 18 economic indicators. And it’s clear to us is that there’s been a shift to a slower growth pattern over the last several months, but yet at this point we don’t see signs of recession, imminent despite what you might be hearing. And I think also another factor which is really important in the way we think about the climate or credit spreads that is a spreads between government debt and investment grade or even lower quality corporate debt and those spreads or the delta’s really quite narrow.

    And that tells us that there aren’t a lot of issues with respect to liquidity. There’s good corporate balance sheet conditions. So investors are not concerned or needing to get a higher premium for investing in corporate debt versus government debt. So anyway, you know, we think a, again, a decent picture but yet a slowing picture as we enter the third quarter of 2019 let’s talk a little bit about monetary policy, which is very much in the news every day. I think as we all know, the federal open market committee met on June 19th and they left the federal funds target unchanged in the range of two and a quarter to two and a half percent. However, most of the discussion and what you’re hearing or reading about is more about what’s the future going forward. And you know, Jerome Powell has been speaking and some of his more recent comments, I have indicated that the committee is seasoned certainties intensifying, certainly even between the months of May and June.

    And he does mention some of the trade concerns going on. So that’s very much out there and very much prevalent in terms of market thinking on, there’s no question that the committee left the door open for rate cuts this year. You know, as we look at the Fed funds future market and looking at July the next uh, FOMC that’s a federal open market committee meeting is at the end of July. The forecast or should say the futures indicate about a 75%, roughly a 75% probability that rates will be cut by a quarter of percent and actually a 25% or thereabouts a probability of a 50 basis point. That’s one half of 1%. We don’t see the ladder at all. Um, and if anything, uh, it would appear that, uh, certainly from a probability perspective that a quarter point may be in the offing. That said, we don’t really see that it’s necessary from an economic perspective.

    We don’t think it improves lending conditions. We think lending conditions are pretty favorable right now. And as I mentioned a few moments ago, talking about spreads, liquidity is quite plentiful, but nevertheless, a, it appears that the market is certainly leaning in that direction and we’ll see how that plays out at the end of July. So, with all that said, we’re in an environment where a lot of the equity markets are hitting new highs and a, again, a, despite the fact that there’s concerns about growth. But again, and I’ll talk a little bit about this in a moment, some of the liquidity issues, but the s and p 500 rows, 18 and a half percent in the first half of the year and 4.3% in the second quarter alone. So hey, that’s um, it’s pretty strong. And in the s and p actually for the first half of the year post its best first half in 22 years.

    So that’s, that’s quite saying something. Also, if you look inside the market domestically, you’re seeing that larger cap stocks are outperforming small and mid cap stocks by a rather healthy margin. So there’s, it’s clear that investors are buying the large caps, some of these mega cap tech stocks, some of which in our view may be getting a little pricey. The other thing that we’re seeing going on is that from a stylistic perspective, growth is radically outperforming value. So those are some of the cross currents inside the market that we see going on. But it’s clear to us that there’s a shift to do a more dovish monetary policy. And again, we would be concerned that, you know, this infusion of monetary leverage is a source for this rise in equity prices. We think that at the end of the day it should be more about earnings and not about monetary leverage.

    Nevertheless, a, just want to state that and I’ll talk about volatility in a moment here as we take a look at, again, a strong market and as I just mentioned, but one of the things we note as we go back over a couple of years, we’ve noted that stock market volatility and we use for example, a, an index or a measure called the Vix Vix, uh, which is a CVOE. It’s a basically a, a takes a look at where measures volatility in the stock market. And we’ve seen volatility rise to higher levels, uh, in each of the last two years. So along with a along economic expansion and a market that’s being fueled by a quote, a dovish fed, we see volatility rising. So we th just think risks arising. I would be remiss if I didn’t mention that international markets equity markets have also performed very well this year through the first half of the year, developed international markets as measured by MSEI Efa, that’s EA, f e Europe, buster, Malaysia, Far East, we’re ahead over 14% and then developing markets or emerging markets are up 10.76%.

    While those numbers are strong, there’s certainly trailing the u s as we know in the u s clearly has been a, from a geographic perspective, the place to be. However, we do want to make sure that we also are thinking about diversification as the shifts can occur rather quickly. So let’s talk a little bit, let’s shift the discussion a little bit and talk about the bond market. Um, it’s this, uh, rise in equity prices. We’ve also seen a decline in bond yields, which again, it’s helped fuel the equity markets quite frankly. And so you know, a lot of of that that which is going on has to do with trade and and tariff issues. And, and also the fact that I mentioned earlier about wages, the market is, isn’t seeing a lot of inflation in the data. And I know that the Fed certainly is looking, is hoping that the inflation rate increases, I should say at a more sustainable level.

    Uh, and so we’ll see how that plays out. We’re not sure necessarily that a rate cut helps in that direction. I’d just say that paranthetically however, the 10 year US Treasury ended the second to yield 2.02% and you know, if you take a look at industrialized nations Canada, United Kingdom, Germany and Japan, we’ve seen a decline in a 10 year bond yields also. And some of those are actually negative. For example, in Japan and Germany, we’re seeing negative 10 year bond yields. So we spent a lot of time looking at yield spreads. I mentioned earlier about the fact that yield spreads are pretty narrow and that gives us a good barometer of lending conditions. So again, the bond market is saying that growth is slowing. It certainly doesn’t see inflation that’s being reflected in bond yields. So in conclusion, you know, we, I put a bunch of data out in front of you and some of our thoughts.

    The question is how do we make sense of all of this now that we’re in the second half of 2019 and, and looking ahead and what does that mean for our client portfolios? And you wonder, the things that you know, we would want to say for sure is that uncertainty is a toxic substance for the financial markets and results in volatility and any uncertainty again, has to do with questions on trade. Um, in tariffs, questions about forecasting earnings, uh, at the late stages of an economic cycle. And again, our concerns about the fact that monetary policy is been a major prop for equity prices and that is of concern to us on a long-term basis. Again, we believe corporate earnings should be the main driver of equity prices, but however, uh, beyond the volatility in the trade front and some of the issues I mentioned, we remained very constructive on the long-term prospects for financial assets.

    If you think back to some of the numbers I put out 2% real GDP growth, inflation not quite maybe running close to 2% on a 2% bond yields is certainly a decent environment for financial assets from a long-term perspective. However, I think the certainly a, you know the, in our view the uptick that I mentioned, volatility if you look at it in a year over year basis underscores the importance of diversification even aside from the fact that international markets underperformed US markets in the first half of the year. So again, a, there’s a lot of cross currents. Again, our observations are that this is a long cycle. It’s 10 years old and as a result growth projections can be very uneven and less predictable. Volatility, certainly accelerates as stresses develop and uncertainties rise. And from a client portfolio perspective, we think it’s a very good time to continue looking at asset allocations versus investment objectives.

    Make sure that the portfolios represent a client’s appetite for risk, particularly given where we are with new highs in the equity markets and certainly valuations that are fairly well, um, in some cases fairly well extended. So, uh, we think there’s certainly opportunities and a, again, diversification and an an attention to asset allocation we think will be the main issues, uh, for, uh, investors to focus on in the back half of this year, particularly as this expansion continues to age. Well, it’s been great to be with you and I’m, I look forward to our discussion, uh, after the end of this current quarter and we’ll try to evaluate the issues we talked about and see what the rest of the year brings. Thank you so much and have a great day.


    This has been a production of Bryn Mawr Trust. Copyright 2019. Visit us online at The views expressed here in are those of Bryn Mawr Trust as of the day recorded and are subject to change without notice. Guest opinions are their own and may differ from those of Bryn Mawr Trust and its affiliates and subsidiaries. This podcast is for informational purposes only and should not be construed as a recommendation for any product or service. BMT Wealth Management provides products and services through Bryn Mawr Bank Corporation and its various affiliates and subsidiaries, which do not provide legal tax or accounting advice. Please consult your legal tax or accounting advisors to determine how this information may apply to your own situation. Investments and insurance products are not bank deposits, are not FDIC insured are not backed by any bank or government guarantee and may lose value. Past performance is no guarantee of future results. Insurance products not available in all states.