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Tuesday, December 4, 2018

Well, it has not happened yet but market moguls believe it is close enough for the yield curve to be inverted. That is like saying you almost got a “touchback” in football. Inches matter and either the 10-year U.S. Treasury yield is above the 2-year T-yield or it is not. The 10-year at 2.95 minus the 2-year at 2.83 is still positive. I have seen a touchback and this is no touchback. Relax and do not fight the Fed – they know what they are doing.

Please see the slope of the yield curve on page 35 of the Global Perspectives book.

Friday, November 30, 2018
CNBC Squawk Box

Uncertainty about rising interest rates has upset markets, but we see this as a passing storm: in our view, the Federal Reserve successfully has unwound its accommodative policy and set the stage for future calm. Seven interest-rate increases in 18 months “ripped the Band-Aid off,” but coincided with one of the greatest economic booms seen in 30 years: record employment, record corporate earnings and record prosperity. After the market surged to record highs last year, we are off on average a few percentage points — big deal, get over it.

Checkout Doug Coté, Chief Market Strategist discuss his 2019 Outlook on CNBC Squawk Box this morning!

Thursday, November 29, 2018

What has changed in the markets over the last week? Essentially nothing. The Commerce Department affirmed real U.S. GDP at 3.5% for the third quarter. Consumer spending surged 0.6% in October, the biggest increase in seven months. Inflation slipped a little, with core PCE coming in at 1.8%. Housing data continue to disappoint, with new home sales sinking to an annual rate of 544,000 — the lowest level since March 2016 but in no danger of crashing. Overall, the U.S. economy is humming, and we believe it is on target for 3% growth in 2018.

Despite such supportive underlying conditions, markets pulled back dramatically, fretting about the sustainability of earnings and trade tensions with China. Expectations for any kind of progress with China during the G20 meeting are very low, so any encouraging signs elsewhere potentially can lift this market.

We saw such a lift this week, when the market turned on a dime, soothed primarily by the perceived dovish comments of Federal Reserve Chairman Jerome Powell. Powell said rates are “…just below the broad range of estimates of the level that would be neutral for the economy...” His words led investors to believe it may not take as many interest-rate hikes as previously thought to get to neutral, which may leave Fed officials open to a pause.

It did not seem to matter that no one really knows exactly what the neutral rate is, or that the Fed said absolutely nothing about a change in its hiking plans. All that mattered was that Powell sounded slightly more dovish than he did previously, and kaboom, the markets took off. Grab another glass of eggnog and stay tuned.

Please watch inflation and the PCE (the Fed’s preferred measure of inflation) on page 60 of the Global Perspectives Book.

Tuesday, November 27, 2018

My gosh, S&P 500 headline earnings growth for 3Q18 is an astounding 28.2% compared to 3Q17. The picture is just as strong when you look at the details: the technology sector grew at 28.7%, financials at 44.7% and energy a whopping 114%. All 11 sectors had positive earnings growth, 78% of companies beat estimated earnings, revenue grew at a commanding 8.5% and the outlook is positive as well. We have all heard that corporate earnings are at a peak; we believe this is incorrect, since forecasters expect earnings over the next four quarters to rise between 8–10%. What the analysts may mean is that earnings growth cannot continue at a run rate greater than 25%, as it has over the last three quarters. Well, no kidding — that is just math — but we are far away from a peak, as it is clear that earnings next year will be higher than this year. In our view, peak corporate earnings is a myth.

Please see Voya Global Perspectives “Fundamentals Drive the Market,” page 6.

Friday, November 23, 2018

Karyn Cavanaugh had a broad and deep message for the markets on CNBC this morning that is sure to give you a lift this Black Friday. Karyn discussed fixed income markets, equity markets, China stimulus, S&P 500 2019 corporate earnings outlook, retail sector and boldly called for a Santa Claus rally. The highlight was when Mr. Jurrien Timmer, Director of Global Macro at Fidelity Investments, asked her for advice on whether the stock or bond markets were giving the correct signal, as there was disagreement within Fidelity. Please watch Karyn Cavanaugh’s entire CNBC Squawk Box appearance.

Wednesday, November 21, 2018

Special Guest Blogger: Tim Kearney

The U.S. economy continues to chug along at a good clip. Inflation, output and expectations were all positive in the most recent readings. Key factors in the outlook remain trade discussions with the Chinese and the Federal Open Market Committee’s (FOMC’s) new reaction function, both of which are qualitative and difficult to assess ex-ante.

Given the calm inflation data, key Fed personnel have been taking steps to walk back their recent, more hawkish tone, suggesting that while the FOMC is likely to hike in December, it is not on autopilot to hike once per quarter in 2019. Chairman Jay Powell kicked off this idea, as he seemed to tack back to the “risk management” approach he outlined in August. Powell favors data-dependent risk management, so as not to pre-empt growth if inflation remains quiescent. His concern is the feedback from global growth back to the U.S. economy through trade and capital flow channels. Fed Vice Chair Richard Clarida continued this line, giving an interesting speech in which he called on the FOMC to be “especially data dependent” and expressing concern that the global economy is slowing. Importantly, he noted that policy is “close to neutral.”

After spiking in October, Fed Funds futures have scaled back down (appropriately, given quiet inflation). The December hike still appears likely, but even that has been knocked down to 67% probability from 75% one month ago. Right now, the markets appear to believe that two hikes in 2019 are likely. I believe we should prepare for at least three based on the likelihood of a U.S. economy surprising the consensus to the upside, which could halt the global slide in growth. On that front, the industrial sector shows more momentum. October capacity utilization outperformed expectations but at 78.4% is below the peaks in 2006 (81%) or 1999 (85%) or 1989 (85%). Industrial production rose by 4.1% YoY in October, continuing an unabated rise from the December 2015 -4% reading.

Tuesday, November 20, 2018

The technology sector had been this year’s high flier. Investors gravitated to the large-cap, proven winners, and why not? In a low growth world, investors were more than happy to pay up for those companies poised to grow faster than others. However, once the Federal Reserve looked determined to keep raising the price of money, stocks trading at higher multiples of their earnings started to look less desirable and more risky at a higher discount rate. What if that expected growth doesn’t materialize, given the trade tensions and the China slowdown?

Hence, the tech sector and newly formed communication services sector (which contains many of the former tech sector stocks) have been the worst performers over the last month — with the exception of energy stocks, which are under siege due to plunging oil prices. Consumer staples, utilities and materials have been the only sectors to post positive returns over the last month.

While tech investors have been crying in their gravy, they may have missed the fact that emerging markets have been UP 2% in the last month and global real estate investment trusts (REITs) have gained 2.8%. What’s more, the equivalent of last week’s leftovers — long U.S. Treasury bonds —also are up, 1% in the last 30 days. Sure sounds like a good case for global diversification and not jumping on the bandwagon based on past returns.

Please see an example of effective global diversification on page 4 of the Global Perspectives Book and don’t forget to set your scales back 10 pounds this week.

Friday, November 16, 2018
Source: Voya Investment Management, 11/16/2018

Most pension funds assume an 8% annual return. In a low-interest-rate environment, that has proven unrealistic, and one of the biggest pension funds in the United States recently rolled back its assumption to 7%. Using the 7% annual return assumption, can you identify the biggest and lowest retirement nest egg savers in the following scenarios?

  • Reliable Ron invested $10,000 a year from age 25 to age 65 (total invested $400,000)
  • Belated Bruce pursued a professional YouTube career from age 25–35, failed, but then got serious and invested $10,000 a year from age 35 to age 65 ( total invested $300,000)
  • Nonconformist Ned invested $10,000 a year from age 25 to age 35, got fed up with corporate America and at age 35 went to live on an elephant sanctuary, never adding to his nest egg again (total invested $100,000)
  • Timid Tony invested $10,000 a year from age 25 to age 65 but kept it in cash, earning an average of 1.5% per year (total invested $400,000)

Which one has the biggest nest egg at age 65? Here are the exact amounts each saver would have at age 65 using a 7% hypothetical annual rate of return (1.5% for cash):

Saver: Hypothetical Annual Rate of Return | Total Amount Invested | Retirement Savings

  • Reliable Ron: 7% | $400,000 | $2,136,095.70
  • Belated Bruce: 7% | $300,000 | $1,010,730.41
  • Nonconformist Ned: 7% | $100,000 | $1,135,365.28
  • Timid Tony: 1.5% | $400,000 | $550,819.12

Source: Voya Investment Management
The above hypothetical scenarios are displayed for illustrative purposes only. Assumes no taxes, fees or expenses.

Obviously, Reliable Ron is the biggest nest egg saver. Timid Tony is the lowest nest egg saver, despite investing more than Belated Bruce and Nonconformist Ned. Most surprisingly, thanks to time in the market, Nonconformist Ned has more than Belated Bruce despite investing only one-third the amount Bruce did. Ah, the power of compounding — Albert Einstein called it the eighth wonder of the world.

Voya IM does not provide tax or legal advice. This information should not be used as a basis for legal and/or tax advice. In any specific case, the parties involved should seek the guidance and advice of their own legal and tax counsel.

Thursday, November 15, 2018

Inflation has not been a problem in 2018 because, as one of my blogging colleagues regularly points out, “the Federal Reserve is credible,” which in essence has prevented an inflation surge. The fact is, however, that the Fed is fighting inflation aggressively and its actions are hitting the market hard. Think about it: there have been eight interest-rate increases in the last three years — seven since President Trump’s election — with more on the near horizon. Higher rates, along with astounding U.S. economic growth, have spurred a surge in the U.S. dollar that is pummeling crude oil and the emerging markets. I expected that the success of U.S. pro-business tax policy would spur Europe to “jump on the bandwagon.” They have not, and I am especially disappointed with Britain’s Brexit plan: instead of taking an opportunity to remake the UK into a competitive, high-growth country, they are opting for Europe-lite.

Please see Voya Global Perspectives 2018 forecast tail risk on inflation shock: big-three growth rates (United States, China, Eurozone) far exceeding expectations could set off an inflation shock, sending bond prices and equity prices plummeting.

Wednesday, November 14, 2018

Special Guest Blogger: Tim Kearney

October brought more calming inflation data. Headline CPI rose by 2.5% year-over-year, up from 2.3% in September but still down from July’s 2.9% reading. Core is back down to 2.1% year-over-year, right on top of its three month moving average. Do not get hypnotized into picking apart the breakdown. Keep your eyes on the big picture; some prices may go up but with a consistent monetary policy, those rises may be offset elsewhere in the report. Looking at inflation sensitive market indicators, we see a rather consistent story and believe that inflation is not going to break out to the upside. The DXY has risen by about 10% since March. Over the past six months, gold has been down by near 10%, oil by 20% and the broad commodity index by 10%. It will be difficult for the Federal Reserve to keep hiking if the inflation rate remains at target, and especially if it moves below target. After all, the FOMC is still concerned about deflation. We are in the sweet spot; what is the opposite of ‘stagflation’?


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