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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.

Friday, January 18, 2019

Across the United States, one in five children and adults — 65 million people — will experience a special need or disability during their lifetimes. Without assistance from government programs, non-profit organizations or employers, caregivers often face a tough and confusing journey — especially when it comes to planning for retirement and a lifetime of continuous care for their loved one with special needs.

When working with clients impacted by special needs, it's important to help them fill gaps of coverage without affecting government benefits. A few of the most effective options for caregivers include:

1. Working with a financial advisor who specializes in special needs planning.
2. Enrolling in accident insurance coverage can limit out-of-pocket expenses in the event of a debilitating accident.
3. Using Special Needs Trusts (SNTs) for cash, investments, life insurance proceeds, and other assets can prevent jeopardizing government benefits and preserve the beneficiary's eligibility for needs-based government benefits such as Medicaid and Supplemental Security Income (SSI). Assets held in these trusts are not counted toward eligibility.

For a more complete list of options and more information, please read the full article by Voya Financial Advisors President Tom Halloran in InvestmentNews.

Thursday, January 17, 2019

As the government shutdown drags on, investors are increasingly worried about the bite it will take out of economic growth. Estimates for 1Q19 GDP are being revised down but when the government does reopen, a rebound likely will ensue. Meanwhile, the data points we have been able to receive during the shutdown have been positive. A bounce-back in the Philadelphia Federal Reserve regional manufacturing index, the drop in initial jobless claims last week and an encouraging start to the 4Q18 earnings season bode well.

For those investors disheartened by the impasse and animosity in Washington, it may be helpful to note that historically speaking, the current acrimony is mild. The 1800 presidential election between former friends Thomas Jefferson and John Adams stands out, as does the 1828 Jackson/Quincy Adams campaign.

As always, we encourage investors to block out the noise and focus on the fundamentals. Please follow GDP on page 70 of the Global Perspectives book.

Wednesday, January 16, 2019

Special Guest Blogger: Tim Kearney

There are a few cross-currents of analysis swirling through the markets: a slower first quarter, brought lower by the government shutdown; a slower but still above-trend growth outlook; and concerns over a potential recession. With the Trump administration and the House in a complete stalemate, and given the Federal Reserve’s stance, which to me seems “data dependent,” there is no ready tool available for further policy easing in the United States. The seeming cognitive dissonance of expectations, for both above-trend growth followed apparently quickly by recession, is actually easy to unpack.

The consensus belief has been that the tax cuts enacted in 2017 have produced a “sugar high,” which is bound to wear off. When it does, the combination of the (inevitable) Fed tightening with the advanced age of the recovery will deliver a recession, perhaps as soon as 2020. The consensus has growth down to 1.5% in the first half of 2020 — call it a growth recession.

The flattening of the yield curve is a major concern among many forecasters. Yield-curve based estimates of the likelihood of recession in 12 months range from 21‒64 percent. Taking a broader look at recession risk beyond the yield curve, however, we see that many indicators are flashing, “grow” rather than “recession.” For example, confidence has slipped but remains high. Yes, interest rates have moved higher but we rate the Fed’s Senior Loan Officer survey as still “mid-cycle.” While the index of leading indicators has slipped, it remains healthy and the labor market remains strong. When contemplating recession risks, we need to look beyond the historic unwinding of quantitative easing and its impact on the yield curve.

Please see current economic metrics on pages 58‒71 of the Global Perspectives book.

Tuesday, January 15, 2019

Investors fear market volatility and have been especially worried about the recent market swings, after becoming used to a low-volatility environment. If you ask investors if they want to buy high or buy low, most likely they will choose to buy low; however, this is difficult to do without volatility. Jay Mooreland, author of “The Emotional Investor,” notes that volatility is subjective. If you took a nap two years ago on January 15, 2017 and woke up today, the S&P 500 is up more than 18% since then and the NASDAQ is up more than 26%. You would conclude that it had been a very good, positive run for the market.

The volatile swings of November and December would not have concerned you in the least, because you did not experience them. Market volatility is inevitable — investors cannot predict or control it. Global diversification potentially may help smooth the bumps, but another simple way to deal with market volatility is to pay less attention to it — do not look at your returns quite so often.

Please see an example of global diversified returns over long periods on page 5 of the Global Perspectives book.


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