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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.

Monday, June 3, 2019

There are concerns with the accelerating trade disputes among our two largest sources of imported goods ($346 billion and $540 billion from Mexico and China, respectively). Despite the scary headlines, the Global Perspectives investment philosophy is unequivocally “fundamentals drive markets.” This trade posturing we would put into our bucket of “do not Washington-proof” your portfolio. This is a catch-all for anything political anywhere in the world, and it is simply gamesmanship. Let’s briefly review what is happening now:

• Recent tariffs on Mexican imports stem from an attempt to more tightly control immigration flows through the Southern border
• In terms of impact on GDP, inflation and other macro variables, the threatened tariffs on Mexico would be fairly small, at least initially
• The larger effect on the U.S. economy is more indirect, manifesting itself through financial markets and confidence rather than immediate hits to growth
• Following the tariff hike imposed upon China, the U.S. also established an export ban on Huawei, one of China’s most powerful technology companies
• As a result, top carriers in the UK and Japan are cutting supplies to China and multinational tech companies are suffering
• The Chinese government has retaliated by creating a blacklist of foreign companies, individuals and organizations that it says are “unreliable” and violate market rules

Despite these trade tensions and to date “empty threats,” U.S. exports and imports are near all-time highs. World economic growth has more than doubled since 2003 and by 50% over the last decade. S&P 500 corporate earnings hit a record high in 2018 and are on track to surpass that record by the end of 2019. Given this extremely positive health report on the world economy, the likelihood of minimal financial impact from the tariffs and low the probability they will become official legislation, we see the current situation as a “Storm before the Calm.”

Please review our 2019 Global Perspectives Forecast: The Storm before the Calm.

Thursday, May 30, 2019

Software is the fastest growing category of business investment. The rapid rate of money flooding into software supports technologies such as artificial intelligence, big data systems and machine learning. Adjusted for inflation, investments in software grew 11% over the four quarters ended 1Q19. In this same timeframe, investments in equipment and structures have grown less than 4% and 1%, respectively. A reason for this software dominance is cloud computing, a set of technologies for sharing server resources. This relatively new technology allows businesses to outsource data storage, better analyze firm data and protect proprietary information.

Customizing and designing software in-house proves to be difficult for other companies to replicate. Thus, the quicker companies invest in proprietary information systems, the sooner they are able to realize profits. As a result, businesses are competing to procure the most talented programmers and data scientists. Companies investing early in software are gaining competitive advantage, and trending towards the success that hardware found nearly two decades ago.

Please see our May 16, blog, “The Risk of Missing out of Rising Markets.”

Tuesday, May 28, 2019

Caution signs in the data out the past week. Perhaps most pertinently, U.S. durable goods orders fell 2.1% MoM in April as expected. Nondefense orders and shipments — which are GDP proxies for monthly forecasters — were weaker than expected at -0.9%. For nondefense orders and shipments, the YoY growth rate is 2.5%, down from 13% 18 months earlier. The Markit PMI also slumped to 50.9 for the composite — a level consistent with growth below 2%. Slowing growth expectations can be seen from the bond market. Rather than just looking at the shape of the yield curve, consider that the whole curve (except for 30-year bonds) is yielding less than the Federal funds target rate of 2.38%. Historically, that has presaged a downturn in an average of 15 months.

Surprisingly, confidence measures remain strong, which could mean that the current lull is just the economy catching its breath after a fast move to the upside. While I support that idea, the canary in the coal mine for breaking trend growth to the upside is investment measures such as durable goods. The key for the future is higher productivity. With the labor force shrinking but confidence high, the final determinant will be capital formation. So far so good, but the data are suggesting a potential turning point.

Please follow business investment on page 71 of the Global Perspectives book.


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