The Woo Group RBC Wealth Management Hong Kong USA - Turbulence Ahead?
A late-month rally allowed munis to post positive performance numbers in June, returning 0.09%. For 2014, performance has been an impressive 6.00%. However, recent monthly returns have been on a declining trend, and we think munis will likely struggle to duplicate the strong H1 2014 performance. Coincidentally, this slowdown in performance comes as the Federal Reserve enters a period where it could be considering how to best
communicate its monetary policy “exit” strategy without invoking a repeat of the 2
“taper tantrum.” The Federal Reserve, at its most recent meeting, repeated that current
accommodative monetary policy will remain in place for a considerable period as the economy slowly recovers. That being said, with recent stronger employment and inflation readings, the more-hawkish members of the Federal Reserve Board are growing restless, analysts are grinding their teeth over the Federal Reserve falling behind the (inflation) curve, and even Fed Chair Janet Yellen warned against becoming complacent because rates
won’t stay low forever. We still believe interest rate normalization will take years and will
be an uneven process. However, as the Fed refines its messaging plan, markets could experience some turbulence. We recommend investors take advantage of these periods of volatility to add bonds to their portfolios at cheaper prices.
In this issue of
Municipal Market Insight
: Muni pillars of support have recently shown signs of stress.
We offer our thoughts, or concerns, on what we see as some
cracks beginning to form in some of the factors which have been supporting the muni market in recent months.
Pension funding shortfalls
roil the muni markets and scare investors. We address the Pension Funding Conundrum and provide clarity and our perspective.