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Thursday, March 7, 2019

Increased productivity allows firms to produce more output with the same level of input. This, in turn, allows for higher profits and the ability to pay higher wages without eroding profit margins or stoking inflation. U.S. productivity advanced 1.9% in 4Q18, a move up from 3Q18 and affirmation of an encouraging trend higher. Annually, the 1.4% increase was the best reading since 2010. Below trend productivity began to turn around in 2017, and it wasn’t caused by a surge in sales of energy drinks.

The means of improving productivity are straightforward — new technologies, investment in human capital with education and training and physical investment in machines and infrastructure. The 2017 tax reform offered incentives to businesses to invest in new technologies and equipment to increase output. The deregulation overhaul made it easier for competition to jump into the market with greater efficiency. Hence, better productivity and improved economic growth allowed the Federal Reserve to raise rates eight times in the last two years.

Europe has failed to receive the memo. European economic growth for 2019 has been slashed from 1.7% to 1.1%. Although 4Q18 GDP growth picked up slightly, the European Central Bank isn’t taking any chances. ECB President Mario Draghi unveiled a new round of “sugary” central bank stimulus in the form of cheap bank loans (TLTRO – Targeted Longer Term Refinancing Operations), its third round since 2016. In addition, the ECB’s guidance revealed that rates will remain on hold for the remainder of 2019.

Please watch U.S. productivity on page 65 of the Global Perspectives book.

Tuesday, March 5, 2019

Special Guest Blogger: Tim Kearney

There are important developments in the running of the Federal Reserve’s monetary policy, centered on the meaning of the inflation target and the disposition of the Fed’s balance sheet expansion. Regarding the target, discussions are beginning to hone in on something akin to nominal GDP targeting or price level targeting. This is a longer-term project, as positions must be worked out and communicated.

By contrast, the discussion over the balance sheet is well underway and in fact, “normalization” seems to be happening. Although the balance sheet has increased by five times since the global financial crisis, there has been no significant inflation — the PCE deflator has averaged 1.8% during this period, the same as the 25-year average ending December 2018.

The flattened yield curve, low level of long-term interest rates, anchored inflation expectations and the fall of commodity prices imply that there is no need for the Fed to reduce the balance sheet further. Nevertheless, recent comments indicate that the reduction process will continue. Be aware that the risks for markets seem to skew more heavily to the downside.

Thursday, February 28, 2019

U.S. economic growth in the fourth quarter surprised on the upside with a GDP reading of 2.6% QoQ (2.9% YoY). Consumer spending pulled back a little from the third quarter, but still made a solid showing with a 2.8% increase for 4Q18. Consumer expenditures are the biggest contributor to economic growth. The snap-back in the consumer confidence index in February (post government shutdown), and the continuing vigorous employment outlook, temper the dismal December retail sales report and bode well for continued economic expansion.

In the 10 years since the recession, consumer spending has been mostly steady. Business spending, however, has been spotty. Companies have been reluctant to invest in nonresidential structures, equipment or intellectual property. As a result, worker productivity growth has been weak. Thus, the increase in nonresidential investment of 6.2% in the fourth quarter, even amidst uncertainty and market turmoil, is a welcome component of GDP and foreshadows an improving productivity outlook.

Productivity is the key to higher trend economic growth. We believe the tax cuts, regulation overhaul and strong corporate profits should provide some muscle to business spending in 2019. In another indication of a bustling economy, the February Chicago Purchasing Managers’ index (PMI) surged to levels not seen in more than a year and included a sharp pick-up in new orders. As February comes to a close, strong U.S. economic data, a patient Federal Reserve and progress in the U.S.-China trade talks generally have produced another positive month of market returns.

Please watch U.S. GDP on page 70 of the Global Perspectives Book.

Tuesday, February 26, 2019

Special Guest Blogger: Tim Kearney

One swallow may not make a spring, but one tweet sure can prompt a rally. President Trump prompted one by tweeting that he will push the trade deadline past March 1, noting “substantial” progress in trade talks with China. This positive news comes at a good time, as the Dutch Bureau for Economic Policy Analysis recently reported that global trade volumes fell by 1.4% YoY — breaking a three-year run of positive readings. More importantly, it appears to be the largest drop in a decade. There are two takeaways: there is a big appetite for resolution of these trade tensions and this is a major known-unknown, an unpredictable issue that will require market participants to remain careful.

It helps that recent U.S. data have rebounded a bit. The February National Association of Home Builders Housing Market index unexpectedly moved up to 62 in January from 58 in December, a bit of ventilation following a yearlong decline. The index is about on its five-year average value. The February Dallas Fed Manufacturing index rebounded as well and outperformed expectations. Unemployment claims are dialing down and remain at 50-year lows. Markit Composite PMI hit 56 versus 54, which was expected.

This all is important to the global economy, as PMIs in Germany, Japan and the Eurozone aggregate all have slumped below 50, i.e., into contraction territory. Germany is now at 47.6; last winter, it was printing near 60. The United States has some heavy lifting ahead but the momentum remains positive.

Tuesday, February 19, 2019

We’ve seen some “sloppy” U.S. data in recent months, starting with December retail sales and heading on to January industrial and manufacturing production. There are reasonable excuses for the downbeat retail report, including the government shutdown, an increase in part-time employment and the now infamous polar vortex. One sparrow does not make a spring, but then there were the industrial production data, where the 0.6% drop in the headline reading was driven by a 0.9% drop in the manufacturing sector. While some blamed the drop on the auto sector, ex-auto manufacturing was down 0.2%.

The combination of these data seemingly supports the Federal Reserve’s current stance, which is essentially, “Do no harm.” With German GDP at zero in Q4 and China stumbling, is the U.S. following suit or the victim of unusual circumstances? The good news on that front is that the February Empire State Manufacturing Survey, the University of Michigan (UM) Index of Consumer Sentiment and Index of Consumer Expectations all exceeded analyst projections. In fact, UM Expectations hit 86.2 in February versus 79.9 in January. A key to come will be the February PMI data, which could provide a clearer indication of the economy’s direction.

Friday, February 15, 2019

According to the National Retail Federation, Valentine’s Day will add $20.7 billion of consumer spending to the U.S. economy in 2019. It looks like the economy is going to need it. Consumer spending drives 2/3 of the U.S. economy represented monthly by retail sales which has been a bright spot and with expectations for a positive December its drop of 1.2% was heartbreaking. To put in context, this -1.2% decline was the worst decline since September 2009, renewing economic worries. Although the reporting period was pre-government shutdown, it was amid a month of violent market swings which may have contributed to the consumers’ reluctance to spend. Fourth quarter U.S. GDP will not be released until February 28. It is expected to confirm a fourth quarter slowdown but is estimated to exhibit solid growth of about 2.7%. Meanwhile, the Eurozone’s GDP continued to disappoint, expanding only a mere .2% in Q4 and although China’s January trade data was much better than expected, it is not yet indicative of a sustained economic pick-up. As Q4 2018 earnings season winds down, economic data and the possibility of a U.S./China trade deal will remain front and center for investors.

Please review retail sales on page 12 of the Global Perspectives book.

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.


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