Big River Report
BIG RIVER CAPITAL MANAGEMENT

Phone: 601.259.3731

Email: wtr3@bigriverfunds.com


RiverView Q3 2018


For accounts invested throughout the full quarter and full year-to-date, the estimated net of fee results:

YTD range +6.91% through +9.06%

Q3 2018 range +2.62% through +7.12%

Federal Reserve Board Chairman Powell gave us a clue into his thinking when the FOMC raised interest rates on September 26.

In the press statement following the rate hike announcement, the Fed dropped the word “accommodative” which had been used to describe the current state of monetary policy.
 
The Fed revealed a number of insights. First, the collective Fed view is that the US economy is strong enough to withstand continued interest rate tightening. Second, the Fed's view of the present level for US interest rates, from an absolute and historical standpoint, is that interest rates are still low. Third, the Fed’s task of preventing US inflation from running substantially above the 2% threshold takes precedent over any collateral damage to emerging market economies resulting from higher interest rates in the US. Fourth, the Fed is not out right opposed to the old fashioned method of tightening monetary policy until the financial markets give the signal that its time to ease financial conditions. 

The Fed's projected path for the US Fed Funds rate calls for a 25 basis point increase in December of 2018 and three separate 25 basis point hikes in 2019, possibly an additional 25 basis points in early 2020.

With 2020 being a presidential election year, it appears that the Fed is planning to complete the bulk of it’s interest rate work in 2019/early 2020, either allowing the US economy to run hot through the election, or alternately being prepared to cut interest rates into any economic weakness in or preceding 2020. 

The current Fed Funds rate range is between 2.00%-2.25%. The Prime Rate is now 5.25%.

The Fed appears set to pause with the Fed Funds rate between 3.00%-3.50%, and the Prime Rate between 6.00%-6.50%.

The Prime Rate has averaged 6.63% since 1950. It is possible that the US economy can continue to grow over the next several years without substantial resistance from monetary policy.

It is also possible that the global economy will be unable to withstand higher interest rates and the simultaneous removal of liquidity from developed market central banks.

The Fed Funds futures are not aligned with the Fed’s interest rate projections. The futures market is presently forecasting only one or two additional hikes remaining in this cycle. If this holds true, we would expect a drawdown in the US equity markets. 

For the most part, the global economy is still in recovery and most developed nations are only beginning to remove monetary stimulus.

Interest rates are still extremely low and even negative in many major economies. For example, recent sovereign yields are as follows: German 10-year at 46 basis points, Japan 10-year at 12 basis points and Switzerland 30-year at negative 5 basis points. 
 
Higher interest rates in the US are straining emerging markets, we are monitoring for any contagion in developed economies. 

European markets weakened late in the quarter with trouble stemming from Italy's new government and an impasse in Brexit negotiations. 

In major emerging markets, China and Hong Kong stock indexes entered bear markets (down at least 20%) during the quarter.

The world has historically high levels of corporate and government debt, higher interest rates could prove problematic at lower absolute levels versus history.

In the US, the effects of higher interest rates are beginning to surface in the home building and automobile industries, both industries are moderating. 

There are no apparent signs that any US industry is falling off of a cliff at this point in time.

The US and China continue tough trade negotiations, but with neither side willing to move, the negotiations could remain on hold until after the US mid-term elections.

An escalation in global trade negotiations could lead to trade wars which would have significant negative economic consequences for the US and the rest of the world.

At the moment, the US inflation rate is moving higher and the US economy is strong. Tariffs on imported goods from China and other nations could add to inflation pressures.

US 10-year Treasury yields moved higher, closing the quarter at 3.06%.

The US corporate bond aggregate is negative for the year, with various bond ETF's down between 1-2%.

It is possible that the bond bull market ended during the summer of 2016 and global interest rates will continue to move higher over time.

Big River's strategies allow suitable clients to reduce bond exposure (or replace any underperforming portfolio asset) and take on additional equity risks.
 
Our focus is on growing your money, see if one of Big River's strategies is right for you.

Call (601)259-3731 or reply to this email to get started.

Thank you,

Bill


*All results are net of actual 1.5% annualized management fee.



BIG RIVER CAPITAL MANAGEMENT, LLC
MONEY MANAGEMENT
CEO: Bill Robertson
Fax: 601.487.6365
Phone: 601.259.3731

Client performance for 2017, net of fees, ranged from +16.68% through +21.25%. This range represents clients who were invested throughout the full year.

During December, the Federal Reserve raised the benchmark Fed Funds rate to between 1.25-1.50%. The prime lending rate is now 4.5%. 

Forecast for 2018 call for three interest rate increases taking the Fed Funds rate to between 2.00-2.25% and the prime lending rate to 5.25%.

The most recent Federal Reserve forecast for 2018 is as follows:

GDP: +2.5%

PCE Inflation: +1.9%

Unemployment: 3.9%

Fed Funds Rate: 2.1%

The bull case for US stocks (stocks will advance without a 20% or greater decline) is that the market is on pace for the longest bull run in history, potentially reaching nine years old in 2018.

The recently passed US tax cuts are expected to add economic growth to a US economy that is already gaining momentum.

The bear case for US stocks (a bear market is defined by a 20% drop in price) is that valuations are historically high, and the good news is already priced in. 

During 2018 the US Treasury is expected to issue roughly $1 trillion in securities to fund the deficit, and the Federal Reserve will reduce it's securities holdings around $230 billion. The result will be a roughly $1.25 trillion increase in supply of treasury related securities.

These market dynamics: high stock market valuations, rising interest rates and an increasing supply of debt securities represent potential catalysts for an inevitable bear market in US stocks.

Alternatively, US stocks could tread water throughout 2018.

Our aim is to build wealth, not time the stock market.

At some point in time, the bull market will end and there will be a bear market. Whatever the new year brings, if we are adequately prepared, there will be opportunities to build wealth.