The market recovery has stalled once again due to uncertainty around the Federal Reserve (“Fed”). In an environment like this, market expectations matter just as much as the actual numbers, and this is reflected in the yield curve. Today, the yield curve is not just inverted, but is unusually shaped due to the Fed’s battle with inflation and the slowing economy. For long-term investors, what does the yield curve suggest about economic growth and Fed policy in the years ahead? Although the yield curve is a technical concept, the basic idea is simple. A yield curve is just a graph that shows the level of interest rates at different time horizons, or maturities. When investors talk about the yield curve, they are typically referring to one based on government-issued U.S. Treasuries since these are considered to be the safest fixed-income securities. The Yield Curve is Inverted Traditionally, economists and market professionals look at the difference between 10-year and 2-year Treasury yields. When the difference is positive, we say that the yield curve is “steep” (it slopes upward to the right, as it did a year ago). When the difference is small, we say that the yield curve is “flat.” When the difference is negative, i.e. 2-year yields are above 10-year yields, the curve is inverted (it slopes downward to the right), as it is today. This is related to the economy because the yield curve tends to flatten as falling growth expectations push down long-term interest rates. Eventually, long-term rates may fall below short-term rates, which are often still high because of Fed policy, thus causing the yield curve to invert. In contrast, when the economy is expanding or coming out of a recession, the yield curve typically has a positive slope and investors are rewarded with higher yields for holding longer-term bonds. The Fed has reiterated its plan to fight inflation with higher rates The yield curve has already inverted twice this year as the 2-year Treasury yield surpassed the 10-year yield in March and again in July due to the economic slowdown. Today’s unusual curve represents the fact that the Fed will need to keep short-term rates high in order to combat inflation, even as long-term growth expectations fall. As the chart above shows, the market expects the Fed to increase policy rates to at least 3.75% by year end, up from a target range of 2.25% to 2.50% today, before allowing rates to moderate. Thus, the key to understanding this dynamic is that they reflect market expectations today. In other words, investors already know that inflation is high, the economy is decelerating somewhat, and that the Fed is accelerating its rate hikes in order to prevent further price increases. What remains uncertain is how quickly inflation might come down and how long the Fed will keep raising rates. This is one reason markets pulled back when Fed Chair Jerome Powell, in his speech at Jackson Hole, reiterated the Federal Reserve’s dedication to fighting inflation with rates that could remain higher for longer. In the Fed’s view, it is important to fight inflation today to prevent persistent price increases even if it risks slowing the economy further. The housing market has softened As it has all year long, interest rates that remain high or continue to rise could impact investors and consumers in many ways. Mortgage rates, for instance, are at their highest level since the global financial crisis, with the 30-year fixed averaging above 5.5%. These higher borrowing costs have cooled the housing market. The number of housing starts, new building permits, and existing homes sold have declined. The number of months of new home inventory, which is the ratio of new homes for sale vs sold, has risen to 10.9, the highest since the Great Recession. In this environment, investors ought to remain patient. Inflation will take time to cool down which means that the fed funds rate will likely remain high through the first part of 2023. A slowing economy, after the rapid historic recovery over the previous two years, is natural and expected. The fact that the Fed needs to thread the needle between these two challenges increases the odds of market over- and under-reactions. As always, avoiding the urge to overreact, especially during temporary pullbacks and periods of rate volatility, is the key to staying on track to achieve long-term financial goals. ____________________________________________________________________________________________________________________________ Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found in Amplify Funds statutory and summary prospectus, which may be obtained above or by calling 855-267-3837, or by visiting AmplifyETFs.com. Read the prospectus carefully before investing. Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. It is not possible to invest directly in an index. Amplify ETFs are distributed by Foreside Fund Services, LLC.
It’s easy to look back at previous market selloffs and wonder how market participants did not see all the warning signs of an imminent selloff. But the very nature of black swan events makes them difficult, if not impossible, to predict. Below are a handful of events that sparked selloffs in the equity markets that few could have predicted.
Investors have navigated a difficult market all year and the third quarter was no exception. Although markets have turned around a bit at the start of October, all major indices ended the last quarter in bear market territory. The S&P 500, Dow and Nasdaq declined 5.3%, 6.7%, and 4.1%, respectively, from July to September. Interest rates jumped with the 10-year Treasury yield climbing above 4% on an intra-day basis, the highest level since 2008. The challenges of persistently high inflation and slowing growth have continued to impact the expectations of both investors and policymakers. In times like these, investors might naturally prefer to wait until it feels comfortable to invest, and even experienced investors may wonder if markets will ever turn around. This is why it’s important to remind ourselves that while bear markets are unpleasant, they also create opportunities for long-term investors. The valuations of major indices, sectors and styles are at their most attractive levels in years, and bond yields are finally at levels that can support portfolio income. Interest rates are rising after declining for 40 years Source: Clearnomics, Federal Reserve A key principle of investing is that achieving long-term returns doesn’t just involve risk – it requires it. This is true whether markets are down due to the economy, geopolitics, a pandemic, or any of the hundreds of investor concerns over the past few decades. After all, if staying invested were easy, everyone would do it and there would be no opportunities at all. History shows that those investors who have the discipline and fortitude to handle market pullbacks are more often than not rewarded. At the same time, it’s also important to understand what is driving these market dynamics. Below, we highlight three important insights that will continue to affect markets and the economy through the remainder of 2022 and beyond. Markets had rallied beginning in June but abruptly reversed course in late August. The turn in the market coincided with Fed Chair Powell’s speech at Jackson Hole during which he emphasized that the Fed would continue to fight inflation by keeping interest rates higher for longer. This message was then reiterated at the Fed’s September meeting with the third 75 basis point hike in a row and higher projections through 2023. This jump in both policy and market rates is breaking a 40-year pattern of declining interest rates. It’s no wonder that financial markets have been volatile as they adjust to a higher cost of capital and slower economic growth. Regardless, both history and the summer period show that markets can move forward once they digest these new expectations. The stock market is adjusting to higher inflation and rising rates Source: Clearnomics, Standar & Poor’s While the first three quarters of this year have experienced poor returns, it’s important to maintain perspective on the past few years. Last year experienced some of the best returns as the world emerged from the pandemic. In all, markets are still quite positive since 2020 and the S&P 500 has gained over 40% since the beginning of 2019. Since markets never move in a straight line, it’s important for investors to take the good with the bad in order to not overreact to short-term events. There is also some good news among the poor economic numbers. Energy prices plummeted throughout the third quarter, reversing much of the effect of Russia’s invasion of Ukraine on oil and gas markets. This helped to bring gasoline prices down, although they are still higher than during any other period over the past decade. Headline inflation – which includes food and energy – has eased as a result. Economists and policymakers continue to focus on “core” inflation which re-accelerated in August, a sign that price pressures have broadened and continue to hurt consumer pocketbooks. This is a key reason the Fed has doubled down on its inflation fight. The Fed expects to keep rates higher for longer Source: Clearnomics, Standar & Poor’s The Fed has communicated that it will keep interest rates higher for longer. This has raised investor concerns over whether the Fed can bring down inflation without creating a deep recession – a so-called “soft landing” versus a “hard landing.” This is a difficult balancing act for the Fed as they try to achieve their dual mandate of both price stability and maximum employment. The markets will continue to adjust to these new expectations in the coming months. One of the main effects of higher interest rates is rising mortgage costs. The average rate on a 30-year fixed rate mortgage is now 6.7% – the highest since the mid-2000s and far above the average of 4% since the last housing bubble. Housing activity is slowing across the board from building permits to housing starts, and from refinancing activity to existing home sales. Staying Invested in Q4 If history teaches us anything, it’s that fighting the urge to overreact to short-term events is one of the keys to long-term investor success. Since the Great Depression nearly a century ago, the market has trended upward over time, following the path of economic growth. Along the way, there have been countless major historical challenges to overcome from wars to bear markets. When zoomed out, these look like blips compared to the gains investors achieved over years and decades. The ongoing bear market is challenging and unpleasant. However, it is no reason for investors to lose sight of their financial goals. In fact, those investors with the discipline and patience to take advantage of opportunities will likely be rewarded in the long run. ________________________________________________________________________________________ Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found in Amplify Funds statutory and summary prospectus, which may be obtained above or by calling 855-267-3837, or by visiting AmplifyETFs.com. Read the prospectus carefully before investing. Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. It is not possible to invest directly in an index. Amplify ETFs are distributed by Foreside Fund Services, LLC.
Press Release
What the Inverted Yield Curve Says About Inflation and the Fed
BLOK-Chain Monthly Commentary September 2022
Press Release
Press Release
Press Release
Press Release
DIVO August 2022 Recap
BlackSwan Risks on the Horizon
3 Investor Insights for Inflationary Markets in Q4