We started the year asking “What Could Go Right?” and it’s time to get the market’s pulse as we begin the second half of the year.

We identified 7 key themes we felt could impact investors at the beginning of 2019:

1) Interest Rates
2) The Fed
3) Credit
4) Curves
5) CEO/CFO Behavior
6) Washington
7) Active Fixed Income

The core of our thesis around the 7 themes was a significant increase in volatility in 2019. This view rests on the basic tenet that we are coming off a period of money being priced too cheap, meaning we were in an artificial rate environment that created capital market distortions and, in many places, poor allocation of capital.

We believe the mispricing of money has also created unhealthy imbalances in the markets and that the market will continue to contend with these imbalances and the re-pricing of risk throughout 2019. With these ongoing changes, we anticipate new valuations and opportunities.

Below we outline our views and expectations of the impact of the 7 themes, both so far this year and more importantly for the rest of 2019.

Theme 1: Interest Rates

As of mid-March, U.S. Treasury rates held within a very tight range. The front-end was pegged to the Fed Funds Rate while the long-end reflected global growth concerns. We expected rate volatility in 2019 and this theme has not disappointed. In the second quarter, Treasuries returned to low yields last registered in the 2016/2017 time period. The bond market is attempting to force the Fed’s hand – pricing in over 100 basis points of cuts – as the market believes the Fed Funds Rate is now too restrictive. The Powell-led Fed has come around to the market noting that “the one overarching goal is to sustain the expansion.” If you’re still counting, the scoreboard is now: Fed 1 | Market 2+.