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Wednesday, January 9, 2019

There is a seeming tatonnement (trial and error process) going on in U.S. markets, as the outlook vacillates over contrasting views on the Federal Reserve, economic growth and the likelihood of recession. The flattening of the yield curve and drop in the year-over-year return on the S&P 500 are driving the negative view. Based on the shape of the yield curve alone, the New York Fed model of a recession 12 months out rose from 3% probability in December 2018 to 21% in December 2019. Such a sharp rise cannot be ignored. The strong employment data put the sharp downturn narrative into question, though admittedly labor is a lagging indicator.

On the other hand, the strong employment picture is likely to keep the Fed poised to tighten. Fair enough. As the new members of the Federal Open Market Committee get comfortable in their chairs, however, markets will focus on the FOMC message of “data dependent, not on a set path at present,” which seems to offer a counter argument to imminent tightening. This back and forth is likely to continue into the early part of 2019, but in the end, the fundamentals win out. Right now, it appears the fundamentals still include good growth and low inflation.

Please see the section on the economy, pages 58–76 of the Global Perspectives Book.

Tuesday, January 8, 2019

Market sentiment has turned notably more positive in the last week. So what changed? In a nutshell, the spectacular nonfarm payrolls report of 312,000 jobs added in December allayed recession fears. Maybe the economy is not falling off a cliff when companies are adding jobs at such a rapid rate. In addition, small business optimism ticked down slightly in December but remains near all-time highs and both the ISM manufacturing and services indicators are firmly expansionary. The trade turmoil is still an issue, but news surrounding the current talks with China is cautiously optimistic. Finally, the Federal Reserve’s tone changed dramatically.

In his latest comments, Fed Chair Jerome Powell showed a gymnast’s instincts, bending over backwards to convey the Fed’s flexibility with both rates and the balance sheet. The willingness to listen to markets and exercise patience and caution was just what investors needed to get their floor routines back on track. Does that mean the volatility is over? Nah. Global growth estimates, trade concerns and rate policies will continue to impact markets, but fourth-quarter earnings season on tap should help settle investors. Expectations are for 12% growth in 4Q18. Looking forward to 2019, we expect earnings growth to slow but not stall; and at the end of the day, advancing corporate earnings are the fundamental drivers of markets.

Please watch the Fed rates and balance sheet moves on pages 34 and 39 of the Global Perspectives Book.

Friday, January 4, 2019

Investing is not for the faint of heart. Nowhere is it implied or explicitly stated that markets operate smoothly or calmly. That would be tantamount to expecting a long ocean trip to be smooth sailing all the way. Ships equipped with radar can anticipate storms but cannot outrun them; the point is to weather the storm and carry on once the seas are calm again. Inexperienced investors are like ship captains who never have been storm-tested. The fastest way to calm for such investors is to sell out of “risk” assets and go to cash. While this solution may reduce the pain of loss in the moment, it risks giving up long-term return potential and heightens the risk that investors will not reach their goals.

For followers of Global Perspectives, there is a North Star that can help them navigate the storms: remember, “Fundamentals drive markets.” Today we see a great example of positive fundamentals — a blowout nonfarm payrolls report of 312,000 for December, resulting in a 3.9% unemployment rate, rising wages, an increase in the participation rate and positive revisions of 58,000 from prior months. Despite aggressive policy tightening from the Federal Reserve — eight interest-rate increases over the last two years — economic growth and jobs are surging due to the powerful pro-business policies of lower taxes and lower regulatory costs to businesses.

Please read the Voya 2019 Forecast “The Storm before the Calm.”

Thursday, January 3, 2019

Global synchronized growth was the buzz phrase in 2017. Global growth divergence was the theme of 2018, with the U.S. economy accelerating while other global economies slowed. Now the latest data is showing a convergence, but unfortunately it is because the U.S. economy is slowing its pace a bit. Manufacturing expanded in December, but declined sharply from the previous month with a reading of 54.1, the slowest pace of expansion since November 2016. This is on the heels of a contractionary manufacturing report from China. Fears of a global slowdown and the possibility of the Fed making a mistake, as well as the government shutdown and ongoing trade tensions are weighing down markets. The fear and pessimism on Wall Street has spilled over to Main Street with consumer confidence dropping in December to the lowest level since July and well off peak confidence levels in October. While there are some reasons for concern, the latest ADP payroll report showed a blowout 271,000 private sector jobs added in December with small and medium sized companies doing the heavy lifting compared to large sized companies. The U.S. economy is still doing fine. A strong employment market, robust consumer spending, falling mortgage rates, low gas prices and still vigorous corporate earnings growth are just a few reasons to greet the new year with cheer not fear.

Please see the Global Perspectives 2019 Forecast: The Storm Before the Calm.

Wednesday, December 19, 2018

Special Guest Blogger: Tim Kearney

The year’s endnote is downcast — not just because equity markets have slid hard, though that is reason enough — but because two years into the administration of President Trump, the first cracks in positive sentiment have opened up in the United States. As a reminder, sentiment measures are important for the “animal spirits” that drive risk-taking and investment. While sentiment is higher than November 2016 for sure, note that the University of Michigan Consumer Sentiment Index, the Empire State Manufacturing Survey, the NFIB Small Business Optimism Index and the weekly Bloomberg Consumer Comfort Index all dropped over the past month. The declines are nothing precipitous, but could develop quickly as a negative shift to the outlook.

A burgeoning story, higher interest rates have hit housing rather hard. December NAHB sentiment fell to 56 from 60 in November and 64 in October. The indicator hit its lowest level in three years, with drops recorded in each subsector — though bad weather likely contributed to the declines.

Inflation remains calm. U.S. CPI and core CPI in November were 2.2% year-over-year. PPI fell to 2.5% YoY, down from 2.9% in October. ISM prices paid fell by a sharp 11 points to 60.7 in November from 71.6 in October. Import prices rose just 0.7% YoY, down from 3.3% in October. Export prices rose by 1.8%, down from 3.1%. Real average weekly earnings remain below 1% at 0.5% YoY in November. While expectations are for a 25-basis-point hike in the Fed funds target rate today, market expectations remain very “dovish” on 2019 rate moves. It appears that the market is expecting barely one rate increase in 2019. Given low inflation rates and anchored inflation expectations — Univ. of Michigan inflation expectations dropped in December, break-evens have moved lower — the Fed will have to be data-dependent to move on rates in 2019. We expect two hikes are likely.

Please see page 34 of the Voya Global Perspectives book for insight into the Fed funds target rate.

Friday, December 14, 2018
Karyn Cavanaugh, senior market strategist at Voya Investment Management, on 'Squawk Box'

Today’s market equivalent of a fruitcake is the latest China data. Both retail sales and industrial production were a disappointment. China’s industrial production was up 5.4% in November year-over-year and retail sales increased 8.1% YoY, but these figures point to a continuing slowdown in China’s economy. Although the United States is bigger than China, China accounts for twice as much global growth. On a positive note, the decelerating data could result in additional Chinese economic stimulus, which has already been working through the China economy and sets up the possibility of a boost in global growth in 2019.

Meanwhile, today’s U.S. consumer data were candy canes. Retail sales were stronger than expected, up 0.5% excluding gasoline in November; October sales were revised up to 1.1% from 0.8%. This indicates that fourth quarter GDP growth may be stronger than anticipated. U.S. industrial production was also upward, increasing by 0.6%, though this was primarily in utilities and mining. Manufacturing output was a little weak, reflecting the slower global growth, trade uncertainty and a strong U.S. dollar. Investors seem to be focusing more on the fruitcake than the candy canes: what has been a positive week for markets may end with a fruitcake thud.

Please see the Voya Global Perspectives 2019 Forecast: “The Storm before the Calm” and watch Karyn Cavanaugh’s latest comments here.

Thursday, December 13, 2018

What is more disappointing than a toy train with square wheels, a spotted elephant or a Charlie-In-the-Box? The energy and financial sectors. They have been disappointing investors all year, both down more than 12% year-to-date despite leading the charge in earnings growth. Energy earnings were up 120% in the third quarter and financials were up 36%. Looking ahead, fourth quarter earnings are expected to grow another 86% for the energy and 20% for the financials. So why are investors so reluctant to reward these sectors?

The volatility in oil prices with a spike in prices this year followed by a plunge, combined with geopolitical tensions, oversupply worries and potential demand slowdown because of China’s economic woes have been driving back investors. Yet, the average price of oil over the last 30 years is $43/ barrel, which is lower than the price today. On the other hand, the financial sector is on the front line of global growth concerns. The yield curve is often blamed for its price underperformance but most of these companies are making money even with a flatter yield curve. Investors are worried about the slowing economic growth and the heightened risk of recession. Growth has slowed but it is still above trend. Recession still looks distant. According to a CNBC survey released today, consumer holiday spending is surging. Despite a drop in optimism, consumers are planning on spending an average of $1100, up from $907 last year. This is the first time this survey reported an anticipated spending amount above $1000. Still, the lack of enthusiasm around energy and financials have driven P/E s down to naughty list levels of 13.4 and 10.7 times, respectively.

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

Tuesday, December 11, 2018

The BREXIT proposal parliamentary vote was postponed yesterday for the simple reason that there was no chance it would pass. The chaotic negotiations are now even more uncertain. One of the biggest issues in the mix is the Ireland/Northern Ireland border once Britain leaves the EU. Lack of a trade deal (a “No-Deal” Brexit) could be extremely disruptive and economically disastrous. Companies in Northern Ireland are making contingency plans by stockpiling goods and devising manufacturing and staff workarounds but the damage would still be devastating. Lately, there has been talk of another referendum and even the potential cancellation of the entire deal. The EU high court affirmed that possibility yesterday in a ruling. As of now, no one knows where this will go but the market seems to think it cannot get much worse.

Meanwhile, riots in France, budget discourse in an economically fragile Italy and a third quarter dip in German GDP are indicative of the struggle in the Eurozone – one of the Big 3 along with China and the U.S. China is also struggling but is showing some positive green shoots in labor and credit markets, as it continues to stimulate its economy. Not surprisingly, the U.S., the biggest of the Big 3, recorded a tick down in the latest NFIB survey of small businesses amid all of the global uncertainty. Still, business optimism levels remain elevated near record high levels as the U.S. economy forges ahead in a pro-business environment. The World Economic Forum has just named the U.S. as the most competitive country in the world.

Please watch for the Global Perspectives 2019 Forecast – The Storm Before The Calm.

Friday, December 7, 2018

The anticipated Santa rally was put on hold this week, detoured by heighted concerns regarding trade and potential Federal Reserve actions. Maybe investors need to check their lists twice. Today’s job numbers were a slight disappointment on the headline with 155,000 jobs added in November, below the 12-month average of 209,000. Wage increases were steady at 3.1% and the unemployment rate remained at 3.7%. This blah report will not likely stop the Fed from hiking in December but it affirms the outlook of moderating growth and a labor market that is not overheating. Perhaps the Fed is closer to the neutral rate than previously thought.

Meanwhile, third-quarter productivity was revised up to 2.3%. This is below the second-quarter reading of 3% but significantly better than the 2012–2016 average of 0.8%. Higher productivity mutes the inflationary effect of wage hikes and allows employers to maintain profit margins. The trade tariffs have trimmed about 0.2% off GDP but overall the economy is still dancing and prancing above trend. The ongoing tension with China is indeed concerning, as are the Brexit negotiations, French unrest and the Italian budget showdown. But don’t count Santa out yet — fundamental earnings are advancing and still look jolly in 2019.

Please watch earnings growth and the market on page 7 of the Global Perspectives book.

Wednesday, December 5, 2018

Belying the sharp downturn Tuesday, there are some positive economic developments as we head towards the turn of the year. U.S. PMI’s were strong across the board, leading off with the Chicago PMI jumping to 66.4 in November from 58.4; this was the highest in nearly two years. The good news did not stop there. Manufacturing PMI hit 59.3, up from 57.7. Employment continued to hum along at 58.4. Most importantly, New Orders made a big comeback to hit 62.1, interrupting a slide. Globally, the manufacturing sector is showing signs of stabilizing especially among the emerging market countries. On that front, Russia, Brazil and India are moving up and Europe may be stabilizing

What ails the market is perhaps unclear communication. President Trump’s tweet that he believes in tariffs, along with confusion over when the 90 day reprieve begins, has generated unnecessary uncertainty over policy direction. After some tamping down of concerns over the FOMC becoming more aggressive, New York Fed President Williams generated some uncertainty. While Williams praised the economy’s strength, he overlaid that with the view that growth is above trend. As such, he unwound the unwinding of rate expectations for 2019. To me, he sounded data dependent but I can imagine a strong non-farm payroll report of Friday will be read from a “Fed Responses” position rather than a “growth is good” perspective. I harken back to the November minutes which are more sober: “a couple of participants noted that the federal funds rate might currently be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity and put downward pressure on inflation and inflation expectations.” Putting it all together, a risk-management report appears to still be the order of the day.


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