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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’?

Friday, November 9, 2018

Wholesale inflation (PPI) surged in October, the fastest pace in six years. The headline was 2.9% and the core-PPI ex-food and energy was 2.6%, both beating expectations. This effectively eliminates any prospect that the FOMC may pause in December. The market does not like it. Meanwhile, Crude Oil WTI is in a Bear Market, having crashed briefly hitting $59 from $75 a month ago. No one is talking about this unusual event but the last time oil prices crashed was due to China’s growth markedly slowing. Is it happening again? – yes and no. It is hard to tell since I do not trust China’s government statistics – for obvious reasons. Back to inflation. The market may be concerned about inflation but with a determined Fed, slowing global growth and one of our Global Perspectives Big Three in trouble, I believe inflation risk is highly overstated – as it has been for the past decade.

Please see page 62 of the Global Perspectives book.

Thursday, November 8, 2018

The elections are over and the market did indeed breathe a big sigh of relief. The outcome resulted in a split Congress which is thought to be good for markets because major legislation, with the potential to upend business plans, seems more unlikely while pro-business initiatives already is place will remain intact. Additional tax cuts are also less probable and that may slow the deficit’s climb. And policy gridlock may also impede legislative growth initiatives, which could curb the strong dollar and rising yields. This would be good for emerging markets. However, there are plenty of uncertainties to keep volatility heightened. The trade war with China is still front and center. The latest China exports number surprised on the upside, soaring 18 percent in October, with demand from other emerging markets particularly strong, an indication of healthy global demand. Keep your eye on China exports and imports on page 49 of the Global Perspectives book.

Wednesday, November 7, 2018
Source: Bloomberg and Voya Investment Management, 6/11/2018

Special Guest Blogger: Tim Kearney

The October employment report was solid up and down the line. The 250,000 headline number outperformed expectations by 50,000 – better than the -16,000 revision to September. Manufacturing payrolls outperformed by 16,000. Labor force participation was up 0.2%, holding above the 2016 lows – a long downdraft arrested. The most important data from last week was average hourly earnings (above 3% for the first time since 2009) and non-farm productivity (2.2% in the third quarter SAAR, 1.3% year-over-year). It is clear that there is a Phillips Curve, but it does not work in the way that many analysts think, from unemployment to inflation. Rather, the Phillips Curve relationship works thusly: tight labor markets drive wages with productivity growth as a constraint. How should we understand rising wages, then? It is the nexus of wage growth, inflation and productivity growth that explains if wages are expanding to such a degree that it can affect markets and the economy. Assuming that CPI growth held at 2.3% in October, the 3.1% average hourly earnings translate into a real wage increase of about 1%. However, the 4-quarter growth of productivity has lifted to 1.3% from zero in 2016. That is modest progress, but implies that unit labor cost growth should not be pressuring profit margins at this point.

Tuesday, November 6, 2018

The winner is…social media. Wow, staggering early voting numbers and expected record turnout is getting close to what we usually see in a presidential election. The stakes are high and all attention is on the House of Representatives. This looks like a coin toss for Republican and Democrats. A positive in all of this is that the election will be over. The results will be certain – whatever party wins. I believe this will be a market positive since the uncertainty will be removed. There may be an initial spike in volatility that will ultimately calm down. Savvy investors will once again turn their attention back to the economic boom focusing on yesterday’s strong October ISM Non-Manufacturing Services index with a reading of 60.3, near a 21-year record high. This result bolsters last week’s strong employment report and ISM Manufacturing report. Meanwhile, Eurozone services PMI was unexpectedly revised up and German September manufacturing orders exceeded expectations. Let us get back to fundamentals and remember the British adage “Be Calm and Carry On.”

Please review the ISM Services chart in the Voya Global Perspectives book.


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