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Wednesday, February 13, 2019

Special Guest Blogger: Tim Kearney

Christine Lagarde, managing director of the International Monetary Fund (IMF), is ringing a warning bell over the direction of the global economy. At the World Government Summit in Dubai, she reportedly spoke of four “clouds” darkening the global outlook: 1) trade disputes 2) financial conditions tightening 3) Brexit uncertainty and 4) China’s slowdown.[1] The speech followed a markdown of the Fund’s global growth expectations for 2019 from 3.5% to 3.7% in late-January. European data continue this “slowing theme.” Throughout the Eurozone, a malaise is setting in. At the Eurozone aggregate level in January, the Business Climate Index, Services Confidence Index, Industrial Confidence, Consumer Confidence and Sentix Investor Confidence all fell. (Sentix was a February reading.) The unemployment rate fell steadily from spring 2013 to fall 2018, but appears to be stalling. Consequently, euro-denominated yields are falling. The 10-year Bund yield has slipped back towards zero. With the euro stable, yields down, the economy soft and inflation muted, there will be an argument for the European Central Bank to hold off on further hikes.

[1] Source:

Tuesday, February 12, 2019
Figure 1. Global REITs are currently outperforming a diverse range of asset classes

Global diversification has gotten a lot of criticism lately — sometimes unnecessarily, in our view. One asset class that comes to mind in this light is global real estate investment trusts (REITs). At present, as measured by the iShares REET (Figure 1), global REITs are the top-performing asset class, up more than 11% year-to-date. But that doesn’t tell the whole story: if you look at the last 12 months, REET is up nearly three times as much as the S&P 500 (iShares IVV) and dominates other equity asset classes. As of today, FactSet estimates S&P 500 fourth-quarter earnings to be up 13.3%, which makes the pessimism in the market confounding: remember, it is fundamentals that drive markets. We advise investors to be broadly, globally diversified.

Please see the 2019 Global Perspectives Forecast – The Storm before the Calm.

Source: FactSet

All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield inherent in investing.

Risks of real estate investing are similar to those associated with direct ownership of real estate, such as changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and credit worthiness of the issuer. Concentration of investments in one or more real estate industries may result in greater volatility than a portfolio that is less concentrated. Other risks of include but are not limited to initial public offerings risks, convertible securities risks, manager risks, market trends risks, non-diversification risks, other investment companies risks, price volatility risks, Rule 144A securities risks, inability to sell securities risks and securities lending risks.

Foreign investing does pose special risks including currency fluctuation, economic and political risks not found in investments that are solely domestic.

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

Wednesday, February 6, 2019
Figure 1. Manufacturing PMI has Generally Slowed across the Globe

Special Guest Blogger: Tim Kearney

The JP Morgan World Aggregate PMI (Manufacturing) fell to 50.7 in January 2019, from 54.4 one year earlier (Figure 1). The slowdown is pretty much general across the globe, with Germany, China, South Korea, Italy and Taiwan below 50 — indicating contraction — and the Eurozone holding on at 50.5, off from 59.6 one year earlier. Contraposed is the United States, where the ISM Manufacturing PMI clocked in at 56.6 in January, up from 54.3 in December and outperforming expectations. The downturn has been gaining since October 2018, as more countries have become sluggish.

In Germany, along with the fading PMI, November industrial production (IP) fell by 4.7% year-over-year and the downturn was generalized across numerous sectors. November factory orders fell by 4.3% YoY, the sixth monthly downturn. December retail sales fell by 2.1% vs. expectations of +1.5% YoY. IFO Expectations in January fell to 94 (below expectations) from 100 in October. Germany might not be in a technical recession, but it looks like a growth recession and that could affect the rest of the Eurozone.

In the U.S., January delivered a strong nonfarm payrolls report. While December was revised down 90,000 to a still-strong 222,000, January at 304,000 outperformed expectations by some 160,000 jobs. Net/net, on the two-month change we recorded a 70,000 increase. The big action was in private payrolls, which were up 296,000 following a 206,000 December increase. Labor force participation outperformed and ticked higher, and the unemployment rate ticked up to 4%. Hourly earnings are a still modest 3.2% YoY. If the economy were not already at full employment, this could be classified as a “Goldilocks” report: strong job growth and stable wages. It’s still good for the economy and markets — just keep an eye peeled for the Federal Reserve coming back onto the playing field at some point.

Please see pages 9‒10 of the Global Perspectives book.

Source: Bloomberg and Voya Investment Management

Tuesday, February 5, 2019

Some key economic data points – particularly GDP and productivity — are delayed because of the government shutdown. Investors seemingly are operating under the old adage, “No news is good news.” January posted the best yearly start in more than 30 years. Small- and mid-cap stocks and global real estate investment trusts (REITs) have been especially popular, up double digits so far this year. In fixed income, high yield is up more than 4.5%. A more dovish Federal Reserve and hopes for a trade deal with China by March 1 are buoying investor sentiment.

Although sparse, U.S. economic news has been good — the labor market is strong, wage growth is stable, manufacturing is humming, confidence has dipped but is still high, services sector activity has trimmed back but is still elevated. On the other hand, global risks are growing with a significant slowdown in Germany and widespread political turmoil darkening Europe’s outlook. All eyes are on China, waiting for its economic stimulus to kick in and, it is hoped, support global growth.

So as January goes, so goes the year? The trend is your friend? Don’t fight the Fed? Cash is trash? Or conversely, trees don’t grow to the sky? Stocks take the stairs up and the elevator down? The easy money has been made? If you look back over the history of the markets, clichés are a silly way to invest. After all, a watched pot does indeed boil, eventually. The only platitude worthy of consideration is don’t put all your eggs in one basket. While it does not preclude a loss, diversification can help manage uncertainty and market volatility.

Timing the market in an attempt to avoid volatility could derail your portfolio objectives. Sometimes the worst days occur within weeks of the best days. A diversified portfolio can help you stay invested during difficult times. It’s not rocket surgery, I mean brain science.

Please see page 26 of the Global Perspectives book.

Friday, February 1, 2019

There is no polar vortex when it comes to jobs. The U.S. economy added 304,000 jobs in January, far surpassing expectations. December was revised down significantly to 222,000, but the three-month moving average is 241,000, giving recession fears the deep freeze for now. Looking under the covers, there was more good news. Wage growth is now firmly and consistently inching higher, up 3.2% year-over-year and luring more people back into the work force.

At 63.2%, the labor force participation rate is the highest it’s been since 2013 and the additional workers in the workforce pushed the unemployment rate up slightly to 4.0%. The leisure, hospitality, education, health and construction sectors showed the highest increases in new jobs. Despite the ultra-low employment rate, inflation is still not an issue. Why? We are still in a low growth global environment. In addition, the last two decades have shown the feedback loop between inflation and employment to be weak.

Other data released today also were robust: the ISM manufacturing index surprised on the upside, coming in at 56.6, and consumer sentiment ticked up. It makes you wonder what the economic data would look like without a government shutdown and ongoing trade turmoil. The patient Federal Reserve is in wait and see mode, looking for more data. We don’t see an interest rate hike in the near future but if we see a rate hike this year it will be for the right reason — higher growth.

Please watch the unemployment rate on page 64 of the Global Perspectives book.

Thursday, January 31, 2019

Federal Reserve Chairman Jerome Powell left nothing on the field at Wednesday’s Federal Open Market Committee (FOMC) meeting. He discussed patience when it comes to interest rate hikes and acknowledged the potential economic downside risks due to the global slowdown, especially in Asia. First down! He then went a giant step further and discussed possible adjustments in the balance sheet reduction. Touch down! The hawks were sidelined and the market went wild.

For quite some time, investors have been worried about an aggressive Fed, trade turmoil and the slowing global economy. While trade and global growth remain worrisome, the Fed does not. The Fed’s pivot toward a decidedly more dovish stance, coupled with earnings reports that so far have been much better than feared, provided the bench support investors needed to move the market up 1% in a day. The S&P 500 is up ~7% this year, not a false start but not exactly an all clear either. Investors should expect volatility to continue to vex markets.

Fundamentals are strong even though U.S. earnings expectations for 2019 have pulled back amid European and Chinese economic “off-sides.” Though the U.S. economy is moving downfield solidly, investors will still need to tackle higher rates and tighter monetary policy in a low growth world. Global diversification, incorporating both stocks and bonds, may potentially help your game.

Please see an example of global diversification on page 5 of the Global Perspectives book.

Wednesday, January 30, 2019

U.S. data show on net that the economy continues to grow, albeit at a more moderate pace, led by the manufacturing sector. Markit Manufacturing PMI clocked in at 54.9 in January, up from 53.8 in December and outperforming expectations. The composite continued solidly at 54.5 in January. Jobless claims broke below 200,000 for the first time in about 50 years. Fed surveys from Kansas City (manufacturing), Chicago (national activity) and Dallas (manufacturing) outperformed. The only tempering factor in the last week was that the Conference Board Index of Leading Economic Indicators stabilized over the past four months. The largest contributors have been equity prices since October and the yield curve. Labor market indicators – including unemployment claims and the ADP survey – show a strong labor market.

It's quite a contrast with the Eurozone, where early-2019 data are showing a continued slowdown. The Markit Eurozone manufacturing, services and composite preliminary January indexes all remained above 50, but barely, and all underperformed expectations. The biggest surprise was the German manufacturing index, which slipped below 50 to 49.9, less than the 51.5 expected. While it is technically below 50, implying contraction, the real story is that the index continues an almost straight-line decline from the high of 62 in late 2017. November industrial production fell 3.3% year-over-year. The Eurozone engine (aka Germany) printed a startling -4.7% YoY in November. A recent German Ifo Institute report showed that weakness was general and no longer limited to the auto sector. Along with the Ifo report, it is little surprise that European Central Bank President Draghi noted risks have moved to “the downside.” Policy divergence and economic performance continue…

Please see Global Manufacturing and Services on page 9 of the Global Perspectives Book.

Tuesday, January 29, 2019

The Federal Reserve begins its Federal Open Market Committee (FOMC) meeting today, and will try hard to become non-controversial in its statements, using language such as “patient” and “data dependent.” This is important because of the turmoil Fed Chair Jerome Powell created in 4Q18 with his hawkish statements and actions. Since then, Powell has walked back some of those statements and seems to have been successful in shifting the spotlight from his every move. But the spotlight needs to shine somewhere — despite all of the good earnings news this quarter, investors continue to worry about the global economy.

China now has a big spotlight shining on its precipitously slowing growth. We have seen several major U.S. companies blame their profit misses on the slowdown in China. Seeking to boost its growth rate and avoid the spotlight, China has resorted to multiple rounds of monetary easing and even corporate tax cuts. The published GDP report showed a 6.4% YoY increase, off a touch from the 6.5% of 3Q18, but many observers believe this figure overstates actual growth. To China we can only say, “Welcome to capitalism; why don’t you practice some free trade while you’re at it, lest the spotlight stay shining bright on your problems.”

Please read about 2019 Risks in our “2019 Forecast: the Storm before the Calm.”

Friday, January 25, 2019
Figure 1. EAFE has lagged other global asset classes over the last 20 years

EAFE is short for the MSCI Europe, Australia and Far East index, a benchmark widely used as a performance and risk gauge of investors’ international holdings. We believe in broad global diversification, but we are beginning to feel that EAFE may not be an optimal gauge to represent international exposure. In a globally diversified portfolio of stocks and bonds, from various countries or regions, we would expect each asset class to sometimes outperform and sometimes underperform the other asset classes in the portfolio. This is the theoretical benefit of diversification: generally, some portion of the portfolio will be performing well, offering the potential to increase returns and decrease risks — though diversification is not a guarantee against loss.

The problem we see over recent investment horizons is that EAFE has trailed other equity asset classes. Figure 1 illustrates this through multi-year periods ended December 31, 2018. Europe, which represents 40% of EAFE, may be the cause of these results: it seems frequently to be in turmoil and has tended to lag return expectations in the past. I intend to explore further whether EAFE truly is an effective diversifier for a global portfolio. This requires deeper analysis than I have space for here, but expect to hear more about this in the future.

Please see page 4 of the Global Perspectives book for historic returns in a globally diversified portfolio.

Source: FactSet, FTSE NAREIT, Voya Investment Management. The five equity asset classes consist of U.S. large cap, U.S. mid cap, U.S. small cap, global real estate investment trusts, international developed market equities and emerging market equities. The graph represents these asset classes, respectively, with the S&P 500 index, the S&P 400 Midcap index, the S&P 600 Smallcap index, the MSCI U.S. REIT Index/FTSE EPRA REIT index, the MSCI EAFE index and the MSCI BRIC index. Returns for periods longer than one year are annualized. Past performance is no guarantee of future results. An investment cannot be made in an index.

Wednesday, January 23, 2019

Special Guest Blogger: Tim Kearney

The United States saw mixed economic data over the past week. Manufacturing production strongly outperformed and rose 1.1% month-over-month (MoM) in December, though industrial production (IP) underperformed thanks to unseasonal warmth. The January University of Michigan consumer sentiment measure fell sharply — as happened during the 2013 government shutdown. Inflation expectations remained anchored in the January survey. Existing home sales continued to slide in December.

There was considerable good news within the manufacturing report. The annualized three-month change of 4% beat the 3.2% year-over-year (YoY) change, a good sign for momentum. Importantly, though motor vehicles rose 4.7% MoM and 7.8% YoY, excluding vehicles the result was still up 0.8% MoM. Durable goods were up 6.5% over three months on an annualized basis, outstripping the 5.3% YoY result. Business equipment spending rose by 7.7% in 4Q18 following a 9.4% rise in 3Q18. The durable goods and business equipment readings are positive indicators of rising capital spending, a necessary condition to increase trend economic growth.

By contrast, global growth developments continue to be sloppy. The JPM Global Manufacturing PMI read 51.5 in December 2018, continuing its yearlong slide from a peak of 54.5 in December 2017. The International Monetary Fund (IMF) lowered its global growth forecasts, from 3.7% to 3.5% for 2019 and from 3.7% to 3.6% for 2020. Though the IMF calls these changes modest, it warns that risks to the downside are increasing, not least from trade tensions. Which brings us to China. The published GDP report showed a 6.4% YoY increase, off a touch from 6.5% in 3Q18, but raising suspicions that the actual rate is slower than reported officially. With PMI below 50, industrial production growth slipping and fixed asset growth sluggish, how much slower is an unanswered but vexing question, especially for Europe.

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


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