To Hedge Risk, Read the Economic Tea Leaves in 2019
Trade wars. Stock market volatility. An economy on the verge of overheating. Rising uncertainty about the Fed’s next moves. Welcome to 2019.
Whatever happened to that more placid era of zero interest rates, when the Fed signaled its first tentative rate hikes months in advance? When that beautiful, unbroken string of positive monthly job reports still had a long way to go before hitting alarm-bell fears of full-employment inflation? To find out, read the final installment of our two-part series of reports on the Shifting Dynamics of a Maturing Expansion.
If we’ve come to expect anything in the final months of 2018, it’s that economic uncertainty may well define 2019 as well. And for institutional cash managers who need to manage portfolio risk, it’s essential to understand the forces at work in this new environment.
In Part One of our series, we looked at how volatility in equity markets, tightening credit conditions, and uncertainty around trade policy are motivating corporate cash investors to take a closer look at their exposures. In Part Two this month, we turn to forces unleashed by the recent upheavals in fiscal and monetary policy and their resulting impacts on currency markets. Spoiler alert: our report concludes that “as we head into 2019, the economy seems precariously positioned.”
Among other things, the huge tax cut was an unprecedented “pro-cyclical” infusion of cash into a full-employment economy. But as the Fed continued tightening monetary policy to prevent inflation, it confronted fears of an economic slowdown or recession. Meanwhile, the Fed’s balance sheet is still bloated with trillions of dollars of post-financial-crisis quantitative easing. So, there is a risk that neither Congress nor the Fed will have adequate fiscal or monetary tools to stimulate growth in the next recession.
Those new economic forces make 2019 an important turning point for institutional cash managers. During the years that the markets spent recovering from the financial crisis, slow-but-steady improvements in the economy helped treasury professionals to methodically assess risk in relatively stable cash portfolios that balanced the need for liquidity with expected returns. But in the coming year, staying on top of the fast-moving changes in a much more dynamic economic environment may well spell the difference between success and failure. Read our report to find out how.