Market Commentary: January 2019

Transcript

1 Milliman Financial Risk Management Market Commentary: January 2019 STOCKS HIT THE GROUND RUNNING IN 2019 WITH Global Equity Markets: 2019 YTD Cumulative Total Return STRONG EARNINGS AND POSITIVE FED GUIDANCE 10% 8 extended The rally that began in the final days of 201  the global equity market through January, pushing its to month return in more than seven years. - alendar highest c 5%  Up 8.0 , its best January since 1987 0 posted %, the S&P 50 - while mid - and small digit cap stocks both notched double - returns for the month. 0%  A declining dollar propelled international stocks higher, with both developed and emerging market equities making significant gains. -5%  All market sectors were higher in January, with Industrials Jan 31 Dec 31 and Energy (led by higher oil) at the front of the (led by GE) S&P 500 S&P EPAC S&P EM S&P Global 1200 . pack  Strong earnings reports were another catalyst pushing stocks higher. Of the 203 S&P 500 companies that reported - Year Historical Range 20 - Day Volatility: 5 Month Correlation to S&P 500 Rolling 3 - 40 earnings in January, 144 beat estimates by an average of 1.0 January December 6.5%. 35 5Yr Avg  As markets climbed higher, volatility ebbed lo wer; t he S&P 5Yr High 0.5 30 500 exhibited about half the volatility in Ja nuary that it did in 5Yr Low December. 25 From its 2018 low on  Christmas Eve through the end of 0.0 20 - January all &P 500 climbed 15% and sits 8% off its , the S 15 time high from September 20, 2018. -0.5 The correlation of the S&P 500 to both international equities  10 market edged lower in January, helping to and the US bond 5 further reduce the volatility of diversified portfolios. -1.0 0 S&P S&P Global S&P S&P Jan 2019 Sep 2018 May 2018 Jan 2018 Joe Becker, FRM 500 1200 EPAC EM Portfolio Strategist – Director S&P EPAC S&P EM S&P US Agg Bond [email protected] Unless otherwise noted, data is sourced from Bloomberg. The recipient should not construe any of the material con tained herein as investment, hedging, trading, legal, regulatory, tax, accounting or other advice. The recipient should not a ct on any information in this document without consulting its investment, hedging, trading, legal, regulatory, tax, accounting and other advisors. The materials in this document represent the opinion of the authors and are not representative of the views of Milliman, Inc. Milliman does not certify the information, nor does it guarantee the accuracy and completeness of suc h information . Use of such information is voluntary and should not be relied upon unless an independent review of its accuracy and completeness has been performed. Materials may not be reproduced without the express consent of Milliman.

2 Financial Risk Management Milliman Commentary: January 2019 Market S&P 500 Managed Risk (MR) vs. 70/30 Blend* (B) MANAGED RISK INVESTING Oil & Inflation: Trailing 6 Months 6% $90 3% Heading into January t he volatility of the S&P 500  B remained well above the 18% volatility threshold of MR . t he S&P 500 Managed Risk Index The Index began $80 the month with a 47% equity allocation, which . lly to 64% as volatility diminished climbed gradua $70 2% , exceptionally strong equity  By virtue of its hedging market performance and a positive bond market Monthly Return trailed Managed Risk Index , the return of the return $60 that of a 70/30 blend * by 146 bps , but also exhibited MR of just 3/4 the volatility the blend and about half of B MR B the volatility of the S&P 500. 1% $50 0% Sep Nov Jan Jul Over the last 10 years, the Managed Risk Index has  Monthly Volatility 14% 8% exhibited an additional average monthly 130 bps of Brent Crude Spot Price ($) YoY CPI 10-Yr Avg 1-Yr Avg January 2019 YoY Core PCE 5Yr Breakeven Infl. Rate volatility over a 70/30 blend * , while generating an bps , equal to an rn ave rage excess monthly retu of 5 Total Returns as of January 31, 2019 . annualized excess return of 0.61 % per year S&P S&P S&P Global S&P S&P S&P US S&P 500 Crude S&P US 70/30  After touching its 2018 low the day after Christmas, 1200 Stock/Bond* 500 MR 400 600 Dollar EPAC EM AGG Oil (Brent) the price of a barrel of oil climbed 18.5% through the end of January, finishing the month at $61.91. 16.2% - 1.3% 5.8% 10.5% 6.6% 10.6% 8.2% 7.6% 0.9% 1 Month 8.0% 4.3% CPI fell to year Year - over -  1.9% even as 5 - yr breakeven inflation bps from its 2018 low climbed 20 1.3% - 1.0% 0.9% - 0.3% 3 Months 0.8% 2.4% - 18.6% - 2.9% 1.1% 10.3% 1.5% came at month end in to 1.70%. Much of the move - 3.8% - 6.7% - 10.3% - 7.4% - 2.6% - 4.6% 2.3% 6 Months 17.3% 0.5% - 1.9% - 3.0% - response to dovish comments from the Fed . implied probability of a  At month end, the futures - - 11.8% - 13.6% - 6.3% 1.9% - 10.2% 5.5% - 2.1% 1 Year - 2.3% - 4.6% - 4.5% - 1.2% e hike. 2019 rate cut was higher than that of a rat 16.3% 31.9% 2.4% 10.4% 11.8% 9.1% 17.3% 15.6% 8.6% 12.4% 1M Volatility 5.0% *Measured by the S&P 500 and the S&P U.S. Agg Bond Index Unless otherwise noted, data is sourced from Bloomberg. The recipient should not construe any of the material con ct on tained herein as investment, hedging, trading, legal, regulatory, tax, accounting or other advice. The recipient should not a any information in this document without consulting its investment, hedging, trading, legal, regulatory, tax, accounting and other advisors. The materials in this document represent the opinion of the authors and are not representative of the views of Milliman, Inc. Milliman does not certify the information, nor does it guarantee the accuracy and completeness of suc . Use of such information is voluntary and should not be relied upon unless an independent review of its h information accuracy and completeness has been performed. Materials may not be reproduced without the express consent of Milliman.

3 Milliman Financial Risk Management Market Commentary: January 2019 MAINTAIN INTENT ON APPEARS FED : PARSING POWELL EXCESS RESERVES INDEFINITELY, ING Reserve Balance Fed Reverse Repurchase Agreements - LARGER ROLE IN FINANCIAL MARKETS ALONG WITH ITS $700  its balance sheet and the creation of excess reserves, the Fed lost its ability to Through the expansion of $600 use of via the the Fed’s control the fed funds rate conventional r eserve management. This necessitated $500 now reverse repo market , in wh ich the Fed transacts with a set of counterparties that is much broader than the relatively short list of primary dealers it conducted traditional open market operations with prior to the $400 financial crisis. $Billion $300 note , Fed economists * In a 2015 paper  The main concern raised by the Federal Op en Market “ that, Committee in using an overnight reverse repurchase agreement facility is that a large and persistent program $200 ” could permanently alter patterns of borrowing and lending in repo markets and money markets as a whole. $100 During his Jan. 30 press conference, i n response to a question about the ultimate size of the balance sheet,  erves are still quite “Remember banks have more reserves than they need. Res Chairman Powell noted, $0 abundant ... We want to have a buffer because we want to be operating in an a bundant reserves regime , 2003 2015 2007 2019 2011 [i.e., interest rate on excess reserves and overnight where we operate through our administered rates reverse repo rate] . If you operate too close to that point of scarcity then you wind up having to have these big Size of Fed Balance Sheet and Excess Reserves ongoing interven tions in the market. We don’t want the Fed to have a large ongoing presence in the market $5 around this, in managing the Fed funds rate. We’d rather have it set by our administered rates. ” Among the many questions posed to Powell, none  he Fed’s motivation . behind this sought to understand t $4 hy does the Fed want to set the fed funds rate via the administered rates, rather than through the pre W - crisis are the source of If excess reserves the Fed’s reliance on the r method of managing reserves? everse repo $3 excess reserves be removed from the system in order to end the Fed’s reliance on the market, must not normalize reverse repo market and to ? its vastly expanded involvement and influence in money markets $Trillion $2  Powell’s comments has no suggest that while the Fed is working to normalize its policy stance, it currently e it larger rol extracting itself from the means of policy implementation. Rather than intention of normalizing its $1 crisis, the Fed seems intent on persist ing in it, took on during the both through its involvement in the reverse the maintenance of excess reserves via a larger balance sheet. repo market and through $0 “ In the paper mentioned above, the  also advised readers to, Keep in mind that the Fed’s operations in authors 2019 2008 2011 2013 2016 fina ncial markets before the crisis were generally quite small and were aimed at affecting conditions in the Fed Balance Sheet Excess Reserves federal funds market, a relatively small market. A large overnight reverse repurchase agreement facility could role in financial intermediation and reshape the financial industry potentially expand the Federal Reserve’s *Ihrig, Jane E., et al. “Rewriting Monetary Policy 101: What’s the Fed’s Preferred Post - Crisis ” over time in ways that are difficult to anticipate in advance. , vol. 29, no. 4, 2015, pp. Journal of Economic Perspective Approach to Raising Interest Rates?” s , stance arkets responded positively to Powell’s comments on policy While m the underlying implications  198., doi:10.1257/jep.29.4.177. – 177 er risks may pose oth methods policy related to that at present are not easily discernable. down the road Unless otherwise noted, data is sourced from Bloomberg. The recipient should not construe any of the material con tained herein as investment, hedging, trading, legal, regulatory, tax, accounting or other advice. The recipient should not a ct on other advisors. The materials in this document represent the opinion of the authors and are not representative of the any information in this document without consulting its investment, hedging, trading, legal, regulatory, tax, accounting and views of Milliman, Inc. Milliman does not certify the information, nor does it guarantee the accuracy and completeness of suc h information . Use of such information is voluntary and should not be relied upon unless an independent review of its accuracy and completeness has been performed. Materials may not be reproduced without the express consent of Milliman.

4 Milliman Financial Risk Management Market Commentary: January 2019 Creating transformational improvement in the retirement savings industry. Milliman is among the world's largest providers of Milliman Financial Risk Management LLC is a global related products and services. The firm actuarial and leader in financial risk management to the retirement has consulting practices in healthcare, property & savings industry. Milliman FRM provides investment casualty insurance, life insurance and financial advisory, hedging, and lting services on $141.9 consu services, and employee benefits. Founded in 1947, December 31 s of billion in global , 2018 ). assets (a Milliman is an independent firm with offices in major Established in 1998, the practice includes professionals nd the globe. cities arou operating from three trading platforms around the world (Chicago, London, and Sydney). MILLIMAN.COM/FRM Chicago Recipients must make their own independent decisions regarding any strategies or securities or financial instruments mentioned herein. 71 South Wacker Drive ncial Risk Management LLC. The S&P Managed Risk Index Series is generated and published under agreements between S&P Dow Jones Indices and Milliman Fina Chicago, IL 60606 e or appropriate for the recipient. Many of the products and services described or The products or services described or referenced herein may not be suitabl +1 855 645 5462 referenced herein involve significant risks, and the recipient should not make any decision or enter into any transaction unl ess the recipient has fully understood all such risks and has independently determined that such decisions or transactions are appropriate for the recipient. London ot represent the perf Past performance is not indicative of future results. Index performance information is for illustrative purposes only, does n ormance of any 11 Old Jewry actual investment or portfolio, and should not be viewed as a recommendation to buy/sell. It is not possible to invest direct ly in an index. Any hypothetical, London epresentative of any investment or product. backtested data illustrated herein is for illustrative purposes only, and is not r EC2R 8DU Any discussion of risks contained herein with respect to any product or servic e should not be considered a disclosure of all risks or a complete discussion of the UK risks involved. +44 0 20 7847 1557 vice. The recipient The recipient should not construe any of the material contained herein as investment, hedging, trading, legal, regulatory, tax, accounting or other ad should not act on any information in this document without consulting its investment, hedging, trading, legal, regulatory, tax, accounting and other advisors. Sydney The materials in this document represent the opinion of the authors and are not representative of the views of Milliman, Inc. Milliman does not certify the 32 Walker Street completeness of such information. Use of such information is voluntary and should not be relied upon unless information, nor does it guarantee the accuracy and North Sydney, NSW 2060 s consent of Milliman. an independent review of its accuracy and completeness has been performed. Materials may not be reproduced without the expres Australia © 2018 /20 1/19 Milliman Financial Risk Management LLC MIL_COM_1 _1 +610 2 8090 9100 tained herein as investment, hedging, trading, legal, regulatory, tax, accounting or other advice. The recipient should not a ct on Unless otherwise noted, data is sourced from Bloomberg. The recipient should not construe any of the material con any information in this document without consulting its investment, hedging, trading, legal, regulatory, tax, accounting and other advisors. The materials in this document represent the opinion of the authors and are not representative of the views of Milliman, Inc. Milliman does not certify the information, nor does it guarantee the accuracy and completeness of suc . Use of such information is voluntary and should not be relied upon unless an independent review of its h information accuracy and completeness has been performed. Materials may not be reproduced without the express consent of Milliman.

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