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Thursday, August 22, 2019

The Wall Street Journal reports “ECB Minutes Back up Signals of Broad Stimulus Package” and “European Central Bank officials gave a further signal that they would launch a big stimulus package in September.” These stories, along with the likelihood that the U.S. Federal Reserve will cut interest rates by 25 basis points at its September meeting, make us believe the central banks are going to show us they still have some tools to affect the economy. September’s “back to school” stimulus may have parents celebrating both a rising market and little Tanner “out of the house.”

Please see “Monetary Policy Outlook,” on page 39 of the Voya Global Perspectives book.

Tuesday, August 20, 2019

Special Guest Blogger: Tim Kearney

Unsurprisingly, consumer confidence remains buoyant: wage growth is positive and labor markets are solid, as shown by another 50-year-low reading of initial claims. Hence, retail sales are good — July outperformed expectations. Early estimates for third-quarter personal consumption expenditures (PCE) remain strong: the so-called “control groups,” which are part of the GDP-PCE report, are up by 5% over the past year and by an annualized 10% over the past three months. While trade concerns have hit large business confidence, the confidence components of the New York and Philadelphia Federal Reserve business surveys outperformed expectations in July — and that was before the improvement in the trade mood later in the month.

Net/net, the economy continues to grow a bit more slowly but appears to be above trend. Manufacturing production in July was off but June was revised up and the three-month change is a solid 1.3%. Durables production is up 3.1% in the past three months, with business equipment up 3.3%. This implies both investment and manufacturing are stabilizing. While there are reasons for concern with the rest of the world in a slowdown and trade tensions remaining, a recession does not seem likely in 2019 or even early 2020.

Please follow manufacturing and industrial production on page 10 of the Global Perspectives book.

Thursday, August 15, 2019

Is it acorns falling or is the sky truly falling? Acorns abound with the on-again, off-again China–United states “trade war.” Wait, was that another “no-deal” Brexit threatened by yet another U.K. prime minister? And Argentina’s S&P Merval index, which plummeted 48% in U.S.-dollar terms due to a major loss in a primary election by President Mauricio Macri – the actual election is in October. There are other “crises” brewing of course, not least Germany’s 2Q19 GDP contraction and a Eurosceptic frontrunner in the Italian election, which are rattling Europe’s financial markets.

These storms belie the structurally sound economy in the U.S. and abroad – no pervasive risk factor such as rising interest rates. Remember that volatility is normal and world events are always in disarray somewhere. In our view, the global economy is the strongest it has ever been; U.S. GDP is at record highs, as are corporate earnings. If it seems like the sky is falling it may just be a lot of acorns.

Please see page 5 of the Global Perspectives book for record high World GDP.

Tuesday, August 13, 2019

Special Guest Blogger: Daniel Wang

The recent slew of incoming global economic data has been disappointing, with the gap between the U.S. manufacturing and services PMIs at a five-year wide point. U.S. trade policy is negatively affecting the manufacturing sector, as we muddle through this weaker than expected capital expenditure cycle and see U.S. manufacturing PMIs slip below the 50 threshold, which indicates contraction. Global trade tensions and political uncertainty also have weakened corporate confidence, and continue to present downside risks to future capex plans and hiring decisions. The service sector is showing some signs of positive momentum while small business optimism has continued to strengthen in five of the last six months. The improvements across service and small businesses suggest continued strength within the tight labor market, which is a positive tailwind for consumption and the U.S. economy as a whole.

The key issue moving forward continues to be whether trade tensions escalate or de-escalate, and how any potential deterioration in trade relationships will impact domestic small businesses and the service sector, which together make up around 90% of the economy.

Please follow capital expenditures on page 11 of the Global Perspectives book.

Thursday, August 8, 2019

Some investors argue further rate cuts are needed. They contend that the global economy is slowing, global manufacturing is in a recession, $15 trillion in global sovereign debt is yielding negative rates, inflation is nowhere to be seen and the U.S. dollar is too strong. On the other hand, the U.S. service-driven economy is still on sound footing; employment is robust, with the latest initial jobless claims dropping 8,000 to 209,000 and consumer confidence in July surging to levels near last fall’s record highs. It is unclear if interest-rate cuts effectively will address any of the global economic woes. After all, won’t other countries just to continue to lower their rates in a race to the bottom? And if necessary can’t the tariff war be resolved quickly with executive action?

As worried investors pile into bonds, driving prices up and yields down, it actually make stocks more attractive because dividends and earnings are now discounted at lower rates. For example, as of June 28, 2019, the 2.00% yield on the ten-year U.S. Treasury note equated to an S&P 500 price-earnings (PE) multiple of 50, i.e., 50 times reported next twelve months’ earnings divided by the S&P 500’s market capitalization.[1] At that same juncture, the S&P 500’s forward twelve-month earnings yield (EP),[2] which is the inverse of the PE multiple, stood at 5.97%, equivalent to a PE of 16.7 without even considering dividends. In our view, this difference between equivalent PEs — 50.0 vs. 16.7 — may point to a potentially attractive opportunity.

Earnings estimates have been cut but they are still hanging in there, and we expect to see higher levels in 2019 than the blockbuster 2018. Advancing earnings and continuing low interest rates may bolster the case for stocks. With global rates so low, you may have heard the acronym TINA — there is no alternative. We believe there is an alternative: global diversification of both stocks and bonds to help cushion the ride of volatility.

Please see page 20 of the Global Perspectives book for a comparison of the earnings yield between U.S. Treasurys and S&P 500 stocks, and watch Matt Tom’s latest comments about the trade wars.

[1]Source: Standard & Poor’s, First Call, Reuters, Bloomberg, FactSet.
[1]Earnings yield is the inverse of the price to earnings (P/E) ratio and is calculated as the sum of the reported next 12 months’ earnings estimates divided by market capitalization. The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. Past performance is no guarantee of future results. An investment cannot be made in an index.

Tuesday, August 6, 2019

Special Guest Blogger: Tim Kearney

A volatile August kicked off in July, with the Federal Open Market Committee’s messaging that its July 31 interest-rate cut was essentially a “mid-course correction.” It appeared at that point the Fed was data-dependent. The Trump administration’s decision to impose further tariffs on Chinese goods affected that outlook from the growth side as well as the policy side. On the growth side, there already was evidence that uncertainty over trade and the global economy was inhibiting investment, thus hindering the potential for growth to break out on the upside. On the policy side, it is not clear how or if the Fed will respond to the trade tensions, and that in itself adds uncertainty.

Good economic news gave a helpful but temporary lift to sentiment. Nonfarm payrolls printed a whisper below the 165,000 consensus. Most interestingly, manufacturing payrolls continued to rebound, up by 16,000 and well above the consensus for a 5,000 rise. Payrolls are a coincident indicator; the manufacturing statistics could reflect stabilization or a slight increase in that sector. Given the business uncertainty over trade and consequent slowing of capital investment, however, the paradigm might just be that businesses are seeing continued demand and are filling it with labor rather than committing to capital inputs.

Please follow capital expenditure, on page 11, and employment, on pages 63–65, of the Global Perspectives book.

Thursday, August 1, 2019

The Federal Reserve got nautical on Wednesday, and instead of sailing directly into a storm chose to tack around it through calmer waters. The market initially thought the Fed’s “tack” — a 25-basis-point cut of the fed funds target rate — was not enough, but the blue skies were quickly in sight. Markets expect another rate cut in September and the bulls are running. Despite this market-friendly news, there has been a relentless negative counter-narrative that has kept investors too cautious. We do not advocate “irrational exuberance,” but instead urge investors to get back to their “normal” equity allocations. In our view, keeping equities well below normal targets is not prudent, instead we consider such a stance “thoughtlessly cautious.”

To see our expectations for 2019 earnings per share growth, please see page 42 of the Global Perspectives book.

Tuesday, July 30, 2019

Special Guest Blogger: Daniel Wang

Recent U.S. expectations reports have shown a bit of life: the University of Michigan’s (UMich) indexes of consumer expectations and inflation expectations, the Bloomberg indexes of consumer comfort and economic expectations and the Philadelphia Federal Reserve’s manufacturing business outlook were all positive. Preliminary U.S. Markit PMI data for July printed at levels congruent with trend U.S. growth, but still soft.

Consumers are still reacting to the good labor market. Retail sales data show three-month growth rates are higher than twelve-month growth rates. For example, sales less autos and gasoline were up 7.4% over three months, versus 5.2% over twelve months. Similarly, the headline sales rate was up 5% versus 3.4%. The Atlanta Fed GDPNow PCE forecast continues to move higher. For the Fed outlook, UMich five–ten year inflation expectations rose from 2.3% to 2.6%.

The trade related downturn in manufacturing has hit Europe hard, with Eurozone Aggregate PMI sliding from 55 to 47.5 over the past year. Recent IP data are showing a stabilization at that level. These data indicate that the slowdown may be ending. Importantly, European Composite PMI is turning up and the market expects the European Central Bank to ease in September.

For background on manufacturing and consumer spending, please pages 9–13 of the Global Perspectives book.

Thursday, July 25, 2019

Special Guest Blogger: Tim Kearney

To state the obvious, the Federal Reserve is set to deliver a rate cut on July 31. In his Congressional testimony, Federal Reserve Chair Jay Powell said that there is room to cut for a number of reasons, citing trade tensions and the global slowdown. In addition, he described the Phillips curve relationship between inflation and unemployment as “weak” and “becom[ing] weaker and weaker and weaker.” (I agree, and expect that “employment Friday” may be a bit less stressful for a few rounds). Analytically, he offered that since there have been few issues arising from the low unemployment rate, monetary policy may have been tighter than necessary.

What is the background to a rate cut? Domestically, U.S. GDP growth appears to have slowed but is still above trend. Retail sales data are accelerating, with the three-month growth rate now higher than the 12-month growth rate. The inflation rate appears to be heading slowly to the Fed’s 2% target. Since the Fed’s model points to small impacts from a single rate cut, there have been some arguments for a 50 basis-point (bp) cut over the past week. I’m looking for 25 bp this month and another cut in September, with December still a possibility for a third; but that will depend on conditions in the intervening months.

Please follow the fed funds target rate on page 34 of the Global Perspectives book.

Thursday, July 18, 2019

The Federal Reserve looks set to deliver a rate cut on July 31 as potential insurance against global economic weakness. Someone forgot to send U.S. consumers the memo about a slowdown, however. Retail sales popped again, up 0.4% in June, and up a whopping 0.7% if gasoline sales are stripped out. (This is because gasoline prices fell in June, another positive for consumers.) June is the fourth straight month of retail sales increases and bodes well for 2Q19 GDP reports. Consumer spending offers a clear window into the U.S. economy, as it accounts for more than two-thirds of U.S. GDP. Although consumer spending is up, so are household savings rates – hovering around a solid 6%.

Meanwhile 2Q19 earnings season has kicked off with more than 80% of the 66 companies to report so far having beaten expectations. Our expectations for 2Q19 earnings call for continued positive growth on the back of record high levels last year. Sure, building permits and housing starts reported lousy numbers yesterday, but the Philadelphia Fed’s July Manufacturing Business Outlook Survey was a blowout, positive surprise, hitting the highest activity levels this year. Good news is outweighing the negative. The Fed may be worried, but for now consumers are sending the slowdown memos to spam and enjoying a summer of spending.

Please watch retail sales on page 12 of the Global Perspectives book and read the Global Perspectives Midyear Update.


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