Big River Long Only Equity +5.67%
Big River Long Short Equity +9.85%
Big River Multi-Strategy Equity +6.20%
Actual client account performance, net of fees, ranged from +5% to +6%.
The US equity markets started the year strong. Toward the end of February, the Federal Reserve notified the markets that interest rates were on course to rise faster then previously anticipated. At that time, the futures market began pricing in three 25 basis point rate hikes for 2017.
The first interest rate increase occurred at the March 15, 2017 meeting when the Federal Reserve raised the Fed Funds rate 25 basis points. This action established the Fed Funds rate between 75 basis points and 1%, and the prime lending rate moved to 4%.
Expectations are becoming more realistic for a 2% Fed Funds rate by the end of 2018. A 2% Fed Funds rate equates to 5% plus for the prime lending rate. The Federal Reserve Board's collective interest rate outlook targets 3% for the Fed Funds rate at the end of 2019. Fed Funds at 3% equals a prime lending rate of 6% or higher.
However, there are many potential negative events which, if they were to occur, would prevent the Federal Reserve from reaching these objectives. One example, the inability of Congress to pass anticipated stimulus legislation in the form of tax cuts and infrastructure spending could potentially have negative consequences for the economy.
The policy objectives of the Federal Reserve Board, maximum employment and 2% inflation, leading to the 3% Fed Funds rate target, represent Federal Reserve Chair Yellen's belief that the US economy can sustain 2% inflation with a natural interest rate of 1% percent.
If we extrapolate this model used by the Fed and apply it to the US ten year note, presently yielding roughly 2.4%, the implications are that either the natural interest rate is presently less than 1% or inflation expectations are less than 2% over the next ten years. If the Fed Funds rate continues to rise along the Fed's current course, it bares watching whether or not inflation can continue to hold firm.
As some market prognosticators suggest, historically, once the Federal Reserve embarks on a rate raising campaign, the Fed keeps tightening until something breaks. Given that Chair Yellen will complete her term at the end of this year, in my opinion, it would take a material adverse change in expectations for the US economy in order for the Fed to alter the current course, which likely means two additional hikes in 2017 establishing 4.5% as the year-end prime rate.
The current state of legislative uncertainty, in the face of rising interest rates, increases the probability of a US recession. Without fiscal stimulus from Congress, the recent rise in positive business and consumer sentiment could reverse, and, with the Fed continuing to tighten, a US recession would become more likely under this scenario.
At this point in time, our baseline outlook is that some form of fiscal stimulus measures are passed, and the US avoids recession in 2017.
Additionally, our baseline view is that the risk-free rate moves to 2% or higher, and the prime lending rate to 5-6%.
So far, the cost of capital for S&P 500 companies, as measured by market interest rates on the securities that these companies have recently issued, has ticked up slightly. However, there has not been any severe re-pricing. Many US based companies are able to borrow in Europe at ultra low rates. At the moment, S&P 500 companies still have ample liquidity at low rates.
To echo the Federal Reserve Chair, the Federal Reserves's current policy stance remains accommodative. However, we will continue to monitor market based measures of liquidity in order to determine the ongoing health of the global economy as monetary conditions tighten.
Our views are flexible because economic conditions change continuously. Our aim is to be prepared and adapt to changing conditions.
Big River offers clients Separately Managed Accounts. According to the regulatory authorities, the Big River portfolios are suited for individuals and institutions who are comfortable with a high degree of risk. That said, there are many levels of risk as well as other considerations unique to each investor. Because every client is different, Separately Managed Accounts allow for a degree of personalization.
In order to determine a portfolio that is best suited for you, whether you are an individual representing your clients or someone investing for yourself, it is important that we take the time to get to know each other well before developing your Separately Managed Account portfolio.
To start the conversation, please feel free to reply to this email in order to schedule a conference call or a meeting. If easier, feel free to call me directly at your convenience (601)259-3731.
On January 1, 2012 Bill Robertson began tracking his personal account, and the results comprise the track
record for Big River Multi-Strategy Equity. On February 1, 2016, Robertson broke out the following two strategies:
Big River Long Only Equity and Big River Long Short Equity in order to track them separately. The monthly
results presented for these two strategies are also from his personal accounts. These results include the
reinvestment of dividends. There are no management fees charged on these personal accounts, and the
results have not been audited.
Big River manages assets for clients in separately managed accounts.
The separately managed account results presented represent the range of actual client results from lowest to highest
during the performance periods. The separately managed account results are presented net of a 1.5% annual management fee.
The performance of a client's separately managed account is expected to vary materially from the performance of
Robertson's personal accounts. The client results have not been audited.