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Tuesday, July 16, 2019

Special Guest Blogger: Tim Kearney

It seems that the Federal Open Market Committee (FOMC) has shifted its monetary policy approach from data dependence to pre-emptive risk management. Last summer, Federal Reserve Chairman Powell appeared to endorse such an approach. His Congressional testimony last week emphasized that (headline) inflation is below the FOMC’s “symmetric 2% objective” and that “cross-currents” weigh on economic activity and the outlook. The question remains: will this approach deliver the three rate cuts by year-end that the market expects?

My expectation is that the FOMC will validate expectations for a 25 basis-point (bp) cut in July but not deliver 50 bp. The FOMC will remain open to a 25 bp cut in September, which likely will happen. I doubt that the Fed is on autopilot to cut based on market expectations. Between now and the December 11 meeting there will be a lot of data that should clear up the direction of economic cross-currents. These are the keys: investment trends, productivity data, nonfarm payrolls, business confidence and trade tensions. I would feel more confident about the outlook being above trend if we see business confidence remaining high among investment firms.

For background on the fed funds target rate, please see page 34 of the Global Perspectives book.

Thursday, July 11, 2019

Special Guest Blogger: Tim Kearney

It’s difficult to understand how markets got so over their skis on monetary policy expectations. As recently as July 3, markets had fully priced in at least a 25-basis-point (bp) cut of the fed funds rate in July, and expectations were moving towards a 50 bp cut. The logic was a combination of an economy which was slowing — though still above trend — and inflation that was a bit below the Federal Reserve’s 2% target. Then those expectations crashed into the hard place of a 224,000 monthly job report accompanied by modest wage increases.

In our view, the 50 bp cut was always unlikely given that those sorts of cuts usually signal a recession is upon us. The economy seems set to remain at an above-trend growth rate, without inflation or wage pressure. Odds still favor a 25 bp cut on July 31, but any actions beyond that depend on the economic data, which could make the Fed’s communications strategy more difficult. Note this, however; if the Fed stops the rate cut cycle it will be for a good economic reason: growth is good.

For background on the fed funds target rate, please see page 34 of the Global Perspectives book.

Tuesday, July 2, 2019

Special Guest Blogger: Tim Kearney

The weekend news — a pause in trade tensions between China and the United States — is a positive development that should help the global economy, though it does leave the sword of Damocles hanging over the manufacturing sector. The reasons for this overhang are twofold: one, the uncertainty has already led to a worldwide manufacturing slowdown; two, a pause implies that the trade problems can kick up again if the talks go badly. Net/net, the sluggishness in the manufacturing sector needs a true boost to shift into higher gear.

Fortunately, central banks are communicating that they stand ready to provide the liquidity the global economy needs; especially as the Federal Reserve’s December 2018 hike appears in hindsight to have been unnecessary. Beyond trade, then, keep your eye on the July 5 nonfarm payrolls report, which may give a good bit of information about the state of the economy and the Fed’s likely next steps.

For background on nonfarm payrolls, please see page 63 of the Global Perspectives book.

Thursday, June 27, 2019

Economic data are coming in weaker across manufacturing, which is often a precursor to weak earnings or worse. The Philadelphia Federal Reserve Manufacturing Business Outlook Survey is at a four-month low, and the Empire State Manufacturing Survey is at a three-year low, as China-U.S. trade war fears persist. The markets are slipping in tandem — a sure sign of a bear market or not? I think not. We have advised not to Washington-proof your portfolio because politicians are a whimsical bunch: today threats, tomorrow hugs. Even the stalwart Fed has “changed its mind,” from multiple rate increases in 2019 to a possible cut of the fed funds target rate as soon as July.

Let’s look at the positives, which include an affirmation of robust 1Q19 GDP growth of 3.1%; record corporate earnings in 1Q19; broad, strong year-to-date market gains in 2019; and robust consumer spending of more than half a trillion dollars per month. Focus on the fundamentals and don’t try to second-guess political risk.

Please see page 7 of the Global Perspectives book for record 2019 corporate earnings expectations.

Tuesday, June 25, 2019

Special Guest Blogger: Tim Kearney

The Federal Open Market Committee changed tack towards the “dovish” end of the spectrum at its June meeting. Market-based indicators are pointing to a cut of the federal funds target rate at the July FOMC meeting, and indicating investors expect a total of four cuts over the coming 12 months. These expectations seem premature on a couple of fronts. Most important, markets are expecting a bounce-back in nonfarm payrolls as early as July 5; it is difficult to square the likelihood of continued, above-trend employment growth with the need to cut interest rates.

Interestingly, the historical data imply that the only times the Federal Reserve has cut rates by 100 basis points in a year was when the economy was already in recession. While the 2Q19 economy has slowed from the recent 3% growth path, it remains above trend, which is not usually when the Fed cuts aggressively. So before the July 31 FOMC meeting, watch the data closely (PCE deflator inflation, employment market and CPI). Don’t be surprised if the data stay the Fed’s hand a bit over the balance of the year.

For background on the fed funds target rate, please see page 34 of the Voya Global Perspectives book.

Thursday, June 20, 2019

Initial jobless claims decreased by 6,000 the week ended June 15. Continuing claims, filled out by those who are unemployed longer than a week, also decreased by 37,000 to 1,662,000 in the week ended June 8. What’s more, the jobless rate is reaching levels that are close to a 50-year low. These data suggest a firm labor market and employers’ distaste for laying off workers, hardly a backdrop for a recession.

The markets are running at all-time highs, yet the Federal Reserve is carefully constructing a potential rate cut. In the Federal Open Market Committee’s two-day meeting this week, the FOMC failed to pass a new rate but hinted that one was possible. While the Fed moves slowly and cautiously, the market is sprinting and may continue to run pre- and post-rate-cut, if fundamentals remain strong.

A positive trade message from the upcoming G-20 meeting could put even more gas in the market’s tank. Nonetheless, looming global uncertainties are keeping some investors from joining this road race. As we always maintain, global diversification can help smooth a bumpy ride.

For background on global strategic diversification, please see page 4 of the Voya Global Perspectives book.

Tuesday, June 18, 2019

Special Guest Blogger: Tim Kearney

Market participants remain focused on central bank outlooks, especially from the European Central Bank (ECB) and the Federal Reserve (Fed). In a recent speech, ECB head Draghi has taken charge to provide more forward guidance on ECB stimulus if inflation fails to move up towards target, or if growth falters. The speech was surprisingly dovish, though the point was to follow inflation and growth data and step in if necessary. The unsurprising result was a weaker euro and sharply stronger equity market.

In the United States, the question is, how will the Federal Open Market Committee (FOMC) play what looks like a “no-policy-change” June meeting? Chances for an interest-rate cut in June appear to be very low, but the heavy positioning is for a July cut. The action is in communications: does the FOMC signal a cut next month or does it play the “data dependent, maybe yes, maybe no” card? Chair Powell’s ability to call the inflation downdraft “transitional” has a limited shelf life. The post-meeting press conference will be a catalyst, especially if a dovish signal is given, or even hinted at.

For background on global monetary policy, please see page 39 of the Voya Global Perspectives book.

Thursday, June 13, 2019

The best hockey players don’t skate to the puck, they skate to where the puck is going to be. Easier said than done, especially when it comes to investing. Often the best performing asset class or sector in one period is the worst performer the following period. For example, look at the healthcare sector: it was last year’s power play but this year has been relatively iced, lagging all other sectors of the S&P 500 index. Reversion to the mean is a powerful force, and investors who keep trying to predict the best performers often find themselves in the penalty box.

This has been a confounding year for investors. The market is up for the year but decelerating global growth and trade uncertainties have investors on edge. Stocks sagged in May but have rebounded sharply so far in June. Recently investors have been warming to a possible interest rate cut but the labor market data do not support a cut — the average monthly payroll increase over the past twelve months is 196,000. Even though the past three months have seen deceleration, the monthly average is still 151,000. Both the twelve- and three-month averages are higher than trend labor force growth over the past year.

One thing is for certain: corporate earnings are still gliding forward. In our view, so far it has been a great year to own both stocks and bonds: global diversification — it’s like playing all over the ice so the puck hits you.

For background on global strategic diversification, please see page 4 of the Voya Global Perspectives book.

Diversification does not guarantee against a loss and there is no guarantee that a diversified portfolio will outperform a non-diversified portfolio.

Tuesday, June 11, 2019

Special Guest Blogger: Tim Kearney

Equity markets have warmed to the “less restrictive trade” and “lower interest rates” week. The news on trade has been better, no question. As for the Federal Reserve, the labor market data themselves do not support a cut. The average payroll figure over the past three months is 151,000, above trend growth in the labor force. Most indicators of labor market slack are not flashing red: average hourly earnings at 3.1% YoY, unemployment claims holding at historical lows, unit labor costs falling and productivity rising. While some analysts are pointing to the CPI printing as a rate cut trigger before the Federal Open Market Committee’s June 19 meeting, the market is pointing to the Fed “passing” this month.

There has been a rush in expectations for a cut at the July meeting. Fed fund futures are now signaling that the market estimate of the probability of the FOMC maintaining its current fed funds target has slipped below 20% from 86% a month ago; what’s more, the probability of two cuts by September is now more than 60%. I believe that this rate cut optimism is premature since the data do not support it yet. While the United States and the rest of the world are slowing, economic growth is above trend and the likelihood of recession remains low. It is not clear to me why the Fed would move ahead with a series of insurance rate cuts right now and leave itself without any ammo for later.

For background on the fed funds target rate, please see page 34 of the Voya Global Perspectives book.

Thursday, June 6, 2019

What a great time to be an equity investor: the trailing twelve-month yield (TTM) for global real estate investment trusts (REITs) is 5.06% and the TTM for the S&P 500 is 1.84%, compared to the 2.10% yield of the ten-year U.S. Treasury note. Yes, investors are getting paid bond-like yields simply for owning stocks, along with the upside potential for capital gains. What’s more, year-to-date total returns as of June 5 for global REITs and the S&P 500 are 15% and 13%, respectively. If you took an equal-weighted basket of equities — including U.S. large cap, mid cap, small cap global REITs, EAFE and emerging markets — the average yield would be 2.55%, that is, higher than current yields on U.S. Treasurys.

Do not be overwhelmed by the headlines; in our view, corporate earnings are on track to reach all-time highs. Buying equities certainly exposes investors to the risks of volatility, but volatility is one of the prices you pay to help build wealth.

For background on dividend yields, please see page 22 of the Voya Global Perspectives book.


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