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Wednesday, September 27, 2017
The 10-Year U.S. Treasury yield has historically tracked closely to the change in nominal U.S. GDP.

The past week brought with it a few key political events worth mentioning:
• In Japan, Prime Minster Abe shocked the market by announcing he will dissolve the lower-house of parliament and called for a snap election on October 22nd, along with announcing an $18bn stimulus package.
• German elections saw Angela Merkel remain chancellor. However, at the same time, she ceded enough votes to the far-right Alternative for Germany party to give it seats in the lower house for the first time since 1953.
• In the U.S. the Administration renewed its push for tax-reform, with mentions of a corporate lower tax rate of 20%; pass-through tax rate of 25%; fewer individual tax brackets; and repatriation. Efforts to repeal Obamacare were extinguished.
Meanwhile, today bond yields are rising in concert with equity prices. Why not? It is what these markets both do on the prospect of higher economic growth due to tax cuts and Japanese stimulus. Please see page 33 of the Voya Global Perspectives™ Book: “Growth & Reflation”. - Special Guest Blogger: Pavel Dekhman

Tuesday, September 26, 2017
Since 1999, earnings for S&P 500 companies have grown more than 200% while the price level is now only 60% higher.

We have seen this movie before. No, it is not Friday the 13th coincidentally happening in two weeks. It is the overwhelming fear that any day this stock market is going to implode, which is exactly what investors have been bracing for – for the last decade. Who can blame them? The simple fact is that the economic statistics globally are gaining speed. Currently - not limited to the U.S. - we are in an economic backdrop of accelerating corporate earnings, broadening manufacturing, strengthening consumer and a pro-business U.S Administration. Meanwhile, U.S. stocks (S&P 500) are up over 11%; MSCI EAFE over 17% and MSCI Emerging Markets over 27% which should be more enticing than the near zero percent return from being in cash-like securities. Most investors don’t realize that these stellar returns are considered risk too but categorized as “upside risk”. Please see page 6 of the Voya Global Perspectives™ Book showing 2017 expected earnings to reach all time record highs.

Friday, September 22, 2017
Lower personal savings rates and household net worth tend to increase the burden on future savings to fund retirement security; rising stock and housing markets have driven household net worth upwards.

The surging stock markets and continued housing price appreciation has brought household wealth to an all-time high of $96.2 trillion. This may be a good time for investors to think about how they are going to keep their standard of living in their retirement, which can frequently last more than 30 years. Many workers say their plan b is to just keep working until they drop. However, a recent survey by the Employee Benefits Research Institute found that although 38 percent of workers anticipate working after age 70, only 4 percent do. You may need a plan c. An effectively diversified portfolio can help investors stay in the market and help build wealth over the long term. Please see the history of household wealth on page 58 of the Voya Global Perspectives™ Book.

Thursday, September 21, 2017
Corporate earnings growth is the barometer for the health of the global economy.

Based on the latest Fed meeting, it seems like the Fed is bound and determined to raise rates. Indeed, the 10 year UST bond yields surpassed 2.25%, the U.S. dollar index ticked up, and the S&P is having its first down day in a week. There are plenty of predictions of an unhappy ending when the Fed begins its balance sheet unwind. Investors are not quite sure of the benefit that the massive bond buying had on the upside and are therefore not sure of the implications on the exit. It’s true that manipulating rates can lead to misallocation of capital and mispricing of assets. Perhaps the Fed’s interference actually suppressed economic growth by propping up weaker players. Maybe not everyone deserved a trophy. Normalization may get bumpy, but it is better for the long term economic growth outlook. Meanwhile, corporate earnings are the true driver of markets. If they can continue to move forward, the market tends to follow. Please follow corporate earnings growth on page 5 of the Voya Global Perspectives™ Book.

Wednesday, September 20, 2017

In a widely telegraphed approach, the FOMC today announced that it will begin balance sheet normalization in October. The plan was already circulated, and it calls for the Fed to allow up to $10bn to run off monthly, with that cap rising every quarter. It’s unchartered territory, but the Fed seems to want this to happen with as much transparency as possible and in a non-disruptive way.

More pertinently is the outlook for the Funds rate. Let’s start with changes to the economic outlook central tendencies, 2017/2018/19: GDP revised up. Unemployment flat – but down in 2019. PCE/Core PCE ticked down in 2017, reaching target in 2018. Funds rate: still looking for a hike in 2017, but revised down in 2018/19. They noted that the hurricane will not change the outlook over the medium term, implying that a step-increase in construction/auto/white good output will be looked through by the economy – and the committee.

Taken together, it’s limited changes and apparently not enough to change their thinking about December and hike rates. Hence, the data may be tough for market participants to read, but the Fed is giving its opinion about what it means – not much. The market has gone from a 45% likelihood of a rate hike in December to 62% currently, tempered by a downward move in the longer-run funds dot.

Don’t fight the Fed, which will hike absent another swoon in inflation. It’s a short-term adjustment, which is unlikely as currently set up to upend the economy.

A couple of longer-term wild cards come into play next year. We are looking towards an FOMC with up to six new members, including Chair and Vice Chair. And tax/regulatory/infrastructure policy is likely to be different; how much isn’t known. For more, please read the 2017 Forecast - A New Path: The Growth and Reflation Trade. - Special Guest Blogger: Tim Kearney

Tuesday, September 19, 2017
The major central banks will continue accommodative monetary policies, and even the European Central Bank has now embarked on a quantitative easing program.

Who cares about a shrinking balance sheet? Apparently not the market. The Fed is expected to announce its plans this week to shrink its $4.2 trillion portfolio of treasury bonds and government related mortgage bonds. Because the Fed is such a big player in these markets, this tightening action could affect markets. But as of now, investors are assuming the run down will be very gradual, slowly working up to a maximum of $50 billion per month. In addition, many are questioning why the Fed was involved in buying bonds in the first place as it deviated from their mandates around employment and price stability and are welcoming this road toward normalization. Meanwhile, other global central banks are still buying bonds and the backdrop of the global economy is looking brighter. So for now the market is not too concerned about the Fed’s balance sheet shrinkage. Please keep an eye on the Fed and other global central banks on page 38 of the Voya Global Perspectives™ Book.

Friday, September 15, 2017
Returns for a globally diversified strategy over the last 10 years refute the notion of a “lost decade”.

The market has been successfully shrugging off the geopolitical risks posed by North Korea. Today, the market is also facing a terror attack in London and some economic data misses. Both retail sales and industrial production were negative in August. Hurricane Harvey may be skewing the numbers, but it will take a couple months to shake out. On the other hand, the inflation data was a little better than expected, lifting the consumer price index to 1.9% YoY - just a shade away from the Fed’s 2% target. Investors may be getting a little complacent and should remember that the line-up is often not a straight line. Market corrections are inevitable. So make sure you are not performing without a net. By the way, those safety net long dated treasury bonds have returned 7.7% (YTD through 9/14). Please see an effectively diversified portfolio on page 4 of the Voya Global Perspectives™ Book.

Thursday, September 14, 2017

Fed Chair Janet Yellen has done a great job holding the Fort down while a pro-business cyclical rebound has been building. It is here and will only get better – naysayers aside. Now it is time for QT or quantitative tapering to shrink the balance sheet, raise the Fed Funds rates, and let the free market reign – once again. The good news is widespread from “sea to shining sea”. Here is what you do not hear mentioned in polite company.
• All 45 of the OECD developed economies have positive second quarter growth.

• Japan’s Q2 annualized growth makes it the fastest growing economy in the G7 at 4.0% annualized.
• Eurozone GDP recorded its strongest YoY growth since 2011 in Q2 at 2.2%.
• The latest UK manufacturing PMI had the second-strongest rise in foreign demand in the series history lifts.
• France has the highest business confidence in 5 years.
• India is one of the fastest-growing major economies in the world.
• US Q2 GDP growth was revised up to 3.0% annualized.
• U.S. CPI today show a broad based rebound for August.
• U.S retail sales are at the highest level ever.
• S&P 500 Corporate EPS Growth in Q2 is 10.6%, the second double digit quarter in a row.

The fundamentals that drive markets clearly are flexing their muscle globally and markets are responding in-kind. Why is the Fed still in a fetal position? Please see page 7 and page 12 of the Global Perspectives™ Book regarding S&P 500 Earnings and Retail Sales respectively.

Wednesday, September 13, 2017
Average hourly wages have climbed unevenly higher, and productivity gains have been inconsistent.

Putting off the debt-limit debate for now opens the way for a serious run at tax cuts still in 2017. The Administration is pushing for a deep cut in business tax rates (perhaps as low as 15%), in repatriation (could bring in a trillion or more) and personal tax relief as well (perhaps doubling the standard deduction). Of course, opinions are divided on how to do it, but a low rate allows for a broadening of the tax base (i.e., reductions in exemptions) which is a positive for growth. With a major deregulation push already underway, it’s pretty clear that a return to a 3% growth rate is more than possible, given the right policies. Economic prospects for the U.S. continue to be positive. Q2 productivity was up 1.5% versus 1.3% expected. Interestingly, the four-quarter moving average is up to 1.5% from sub-zero a year earlier. A business tax cut, with an emphasis on capital formation, is very important to raising productivity growth. What’s more, increased productivity (basically, a raise in the capital/labor ratio) is the key to driving real wages higher as well. Over the last eight quarters, private investment growth has averaged just a 0.4% run-rate. Hard to improve productivity without giving workers more tools. Taken together, with the probability of recession in the next year low and with the manufacturing sector picking up, growth can hit 3% in Q3 again and into 2018. Please review "Labor and Productivity" on page 64 of the Voya Global Perspectives™ Book.

Tuesday, September 12, 2017
Doug Cote

As the market hits all-time highs, the bearish talk increases. The bull market is too expensive, the bull market is too old, the bull market is too narrowly focused on tech stocks. Yet, still the bull charges forward. Why? The forward P/E on the S&P500 Index is 17.6, not too far from the historic average and actually fair given the low interest rates and an “E” that keeps getting larger. In addition, bull markets don’t just keel over from old age but are usually derailed by a myriad of other events - recessions, bubbles popping, extreme geopolitical events, overzealous central bank actions which corrode market fundamentals (corporate earnings). And while some high flying tech stocks may be richly valued, the tech sector delivered a grizzly sized 15.2% earnings growth in Q2. All of these factors amid a backdrop of global synchronized expansion and the possibility of tax reform are creating a bear repellant spray for investors. A diversified portfolio may make your bear spray more effective and help when the bears do come calling. Please watch Doug Cote’ deliver his latest market synopsis on CNBC’s Squawk Box.


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