June 2018
Non-Operating
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National Non-Operating Observations
Overall, macroeconomic conditions remained stable in May. U.S. employment, as measured by the monthly change in non-farm payrolls, has shown consistent growth since early 2011, averaging about 200,000 new jobs per month. This growth has driven the unemployment rate below 4 percent, from a high of nearly 10 percent in the aftermath of the 2008-09 financial crisis. U.S. policymakers have kept a keen eye on the overall employment picture and its corresponding impact on wage inflation, especially as the U.S. economy appears to be nearing “full employment.” Financial markets were strong in May. U.S. employment data has continued to be robust, providing support to the U.S. economy and driving the Federal Reserve to continue increasing interest rates. The Federal Reserve has raised its benchmark interest rate twice in 2018 and is broadly expected to raise rates twice more before year end. This has put upward pressure on short-term rates. However, long-term interest rates have not increased as much, and these rates even decreased broadly from April to May 2018. This has led to a broad flattening of the borrowing yield curve, with investors only demanding relatively small increases in yield for lending money for longer maturities. Hospitals expect profitability to be stronger in July, although numbers are expected to fall slightly under last year’s performance. Expectations are cautiously optimistic.
*60/40 Asset Allocation assumes 30% S&P 500, 20% MSCI World, 10% MSCI EM, 40% Barclays Agg.

May 2018
Month Over Month Change (bps)
Year Over Year Change (bps)
General


GDP Growth
2.2%
n/a
n/a
Unemployment Rate
3.8%
(10)
(50)
Personal Consumption Expenditures
1.8%
n/a
+32
Liabilities
1m LIBOR
2.0%
+9
+94
30yr MMD
2.87%
(22)
+10
30yr Treasury
3.01%
(8)
+13
Assets
Monthly Return on 60/40 Asset Allocation*
+0.8%
n/a
n/a
Non-Operating Assets
World stock markets have rallied since the 2008-09 financial crisis and have shown strong, coordinated growth since the 2016 U.S. election. Interest rates across the world also have fallen to historic lows. Both these developments have been positive for equity and fixed-income investment portfolios. In May, world stock market performance was mixed, with the MSCI World Index up 0.7 percent but the MSCI Emerging Markets Index down by 4.5 percent. U.S. Treasury and tax-exempt yields saw strong performance in May, further flattening the borrowing yield curve. Recent volatility in the U.S. stock market and increases in long-term interest rates had put a damper on investment performance in 2018. But the market volatility seen earlier this year was absent during the month of May. As a result, U.S. stock markets performed slightly higher in May, with the Standard & Poor’s 500 increasing by 2.9 percent. A stronger U.S. dollar has hit emerging markets hard, with exchange-rate and equity valuations being driven downward. Strong earnings growth from U.S. companies has continued to support the overall stock market, but recent trade-limiting moves by the United States, China, and other major economies could affect global supply chains and negatively impact earnings. Equity valuations remain high but justifiable in light of economic prospects and unfavorable alternatives in the bond markets given the rising-rate environment.
Long Term
Last Twelve Months
Long Term
Last Twelve Months
Non-Operating Liabilities
Capital market borrowing levels, as approximated here by the “30-Year U.S. Treasury” and “30-Year Municipal Market Data (MMD) Index” exhibits, are dependent upon macroeconomic conditions, including inflation expectations, gross domestic product (GDP) growth, and investment opportunities elsewhere in the market. Additionally, investment flows into and out of mutual funds directly impact the appetite and portfolio composition of long-term investors. Fund inflows generally are moderate and consistent over some time horizon; fund outflows are typically large and sudden, as external events affect investor sentiment, resulting in selling of bonds at lower prices and higher yields. Recent months have shown an oscillation between large or moderate inflows and small outflows. We appear to be at an inflection point as investors digest recent fiscal policy moves, trade decisions, and macroeconomic reports.
Long Term
Last Twelve Months
Long Term
Last Twelve Months
Assets
Liabilities
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©2018 Kaufman, Hall & Associates, LLC
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