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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.

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.


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