Farmers Trust Co. Provides Q2 Investment Outlook
CANFIELD, Ohio — With the Federal Reserve changing its stance on raising interest rates the market is now responding, but Farmers Trust Co, is cautioning slowing growth and slowing inflation for the remainder of the year, according to a new investment outlook released by the company.
The complete turnaround in monetary policy by The Federal Reserve has had an effect on bond prices and yields with the benchmark 10-year U.S. Treasury rate falling dramatically from the 2018 high of 3.24% to 2.0% at the end of June. Lower interest rates have benefited existing bondholders, as the Barclays Intermediate Government/Corporate Bond index returned 4.97% for the first 6 months of 2019. High-yield bonds performed even better, recording a 9.94% gain year-to-date.
In addition, domestic equity indices have demonstrated strong performance midway through 2019 with the S&P 500 gaining 18.54% in the first half of the year and small cap stocks (as measured by the Russell 2000 Index) up 16.98% over the same time.
“The primary catalyst for this has been a more dovish Federal Reserve Bank. The market now expects a significant reduction in the Fed Funds rate in the second half of the year, which should push bond yields even lower,” said John D. Stewart, senior vice president and chief investment officer for Farmers Trust Co.
For the remainder of 2019, slowing growth in both Real GDP and corporate profits and slowing inflation is expected. Economic growth was strong in the first quarter of 2019 with Real GDP expanding at an annualized pace of 3.1% (vs. 2.2% in Q1 of 2018). However, the year-over-year Real GDP comparison will become much more difficult to meet or exceed when the second quarter numbers are released.
Economists are estimating that the data will show the economy growing at or just below 2% for the second quarter of 2019, well below the second quarter 2018 reading of 4.2%.
“Similarly, corporate profits have a nearly impossible task of meeting or exceeding the growth rate they experienced in the second quarter of 2018 when quarterly profit growth was 24.82%. It is important to note that both economic growth and corporate profits are still growing – just not at the torrid pace they were last year,” Stewart said.
Lastly, inflation remains at or near the Fed target rate of 2%, and is likely to decline from that level in the second half of 2019, Stewart added, “The deceleration of key variables like corporate profits and Real GDP leads us to be cautious with our near-term outlook.”
Farmers Trust Co. manages over $1 billion in assets. With offices in Youngstown, Howland, Canton and Wooster, Farmers Trust offers a broad range of estate, trust, investment and pension services to both institutional and private clients.
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