Today's Blog

Main content

Tuesday, June 18, 2019

Special Guest Blogger: Tim Kearney

Market participants remain focused on central bank outlooks, especially from the European Central Bank (ECB) and the Federal Reserve (Fed). In a recent speech, ECB head Draghi has taken charge to provide more forward guidance on ECB stimulus if inflation fails to move up towards target, or if growth falters. The speech was surprisingly dovish, though the point was to follow inflation and growth data and step in if necessary. The unsurprising result was a weaker euro and sharply stronger equity market.

In the United States, the question is, how will the Federal Open Market Committee (FOMC) play what looks like a “no-policy-change” June meeting? Chances for an interest-rate cut in June appear to be very low, but the heavy positioning is for a July cut. The action is in communications: does the FOMC signal a cut next month or does it play the “data dependent, maybe yes, maybe no” card? Chair Powell’s ability to call the inflation downdraft “transitional” has a limited shelf life. The post-meeting press conference will be a catalyst, especially if a dovish signal is given, or even hinted at.

For background on global monetary policy, please see page 39 of the Voya Global Perspectives book.

Thursday, June 13, 2019

The best hockey players don’t skate to the puck, they skate to where the puck is going to be. Easier said than done, especially when it comes to investing. Often the best performing asset class or sector in one period is the worst performer the following period. For example, look at the healthcare sector: it was last year’s power play but this year has been relatively iced, lagging all other sectors of the S&P 500 index. Reversion to the mean is a powerful force, and investors who keep trying to predict the best performers often find themselves in the penalty box.

This has been a confounding year for investors. The market is up for the year but decelerating global growth and trade uncertainties have investors on edge. Stocks sagged in May but have rebounded sharply so far in June. Recently investors have been warming to a possible interest rate cut but the labor market data do not support a cut — the average monthly payroll increase over the past twelve months is 196,000. Even though the past three months have seen deceleration, the monthly average is still 151,000. Both the twelve- and three-month averages are higher than trend labor force growth over the past year.

One thing is for certain: corporate earnings are still gliding forward. In our view, so far it has been a great year to own both stocks and bonds: global diversification — it’s like playing all over the ice so the puck hits you.

For background on global strategic diversification, please see page 4 of the Voya Global Perspectives book.

Diversification does not guarantee against a loss and there is no guarantee that a diversified portfolio will outperform a non-diversified portfolio.

Tuesday, June 11, 2019

Special Guest Blogger: Tim Kearney

Equity markets have warmed to the “less restrictive trade” and “lower interest rates” week. The news on trade has been better, no question. As for the Federal Reserve, the labor market data themselves do not support a cut. The average payroll figure over the past three months is 151,000, above trend growth in the labor force. Most indicators of labor market slack are not flashing red: average hourly earnings at 3.1% YoY, unemployment claims holding at historical lows, unit labor costs falling and productivity rising. While some analysts are pointing to the CPI printing as a rate cut trigger before the Federal Open Market Committee’s June 19 meeting, the market is pointing to the Fed “passing” this month.

There has been a rush in expectations for a cut at the July meeting. Fed fund futures are now signaling that the market estimate of the probability of the FOMC maintaining its current fed funds target has slipped below 20% from 86% a month ago; what’s more, the probability of two cuts by September is now more than 60%. I believe that this rate cut optimism is premature since the data do not support it yet. While the United States and the rest of the world are slowing, economic growth is above trend and the likelihood of recession remains low. It is not clear to me why the Fed would move ahead with a series of insurance rate cuts right now and leave itself without any ammo for later.

For background on the fed funds target rate, please see page 34 of the Voya Global Perspectives book.

Thursday, June 6, 2019

What a great time to be an equity investor: the trailing twelve-month yield (TTM) for global real estate investment trusts (REITs) is 5.06% and the TTM for the S&P 500 is 1.84%, compared to the 2.10% yield of the ten-year U.S. Treasury note. Yes, investors are getting paid bond-like yields simply for owning stocks, along with the upside potential for capital gains. What’s more, year-to-date total returns as of June 5 for global REITs and the S&P 500 are 15% and 13%, respectively. If you took an equal-weighted basket of equities — including U.S. large cap, mid cap, small cap global REITs, EAFE and emerging markets — the average yield would be 2.55%, that is, higher than current yields on U.S. Treasurys.

Do not be overwhelmed by the headlines; in our view, corporate earnings are on track to reach all-time highs. Buying equities certainly exposes investors to the risks of volatility, but volatility is one of the prices you pay to help build wealth.

For background on dividend yields, please see page 22 of the Voya Global Perspectives book.

Monday, June 3, 2019

There are concerns with the accelerating trade disputes among our two largest sources of imported goods ($346 billion and $540 billion from Mexico and China, respectively). Despite the scary headlines, the Global Perspectives investment philosophy is unequivocally “fundamentals drive markets.” This trade posturing we would put into our bucket of “do not Washington-proof” your portfolio. This is a catch-all for anything political anywhere in the world, and it is simply gamesmanship. Let’s briefly review what is happening now:

• Recent tariffs on Mexican imports stem from an attempt to more tightly control immigration flows through the Southern border
• In terms of impact on GDP, inflation and other macro variables, the threatened tariffs on Mexico would be fairly small, at least initially
• The larger effect on the U.S. economy is more indirect, manifesting itself through financial markets and confidence rather than immediate hits to growth
• Following the tariff hike imposed upon China, the U.S. also established an export ban on Huawei, one of China’s most powerful technology companies
• As a result, top carriers in the UK and Japan are cutting supplies to China and multinational tech companies are suffering
• The Chinese government has retaliated by creating a blacklist of foreign companies, individuals and organizations that it says are “unreliable” and violate market rules

Despite these trade tensions and to date “empty threats,” U.S. exports and imports are near all-time highs. World economic growth has more than doubled since 2003 and by 50% over the last decade. S&P 500 corporate earnings hit a record high in 2018 and are on track to surpass that record by the end of 2019. Given this extremely positive health report on the world economy, the likelihood of minimal financial impact from the tariffs and low the probability they will become official legislation, we see the current situation as a “Storm before the Calm.”

Please review our 2019 Global Perspectives Forecast: The Storm before the Calm.

Thursday, May 30, 2019

Software is the fastest growing category of business investment. The rapid rate of money flooding into software supports technologies such as artificial intelligence, big data systems and machine learning. Adjusted for inflation, investments in software grew 11% over the four quarters ended 1Q19. In this same timeframe, investments in equipment and structures have grown less than 4% and 1%, respectively. A reason for this software dominance is cloud computing, a set of technologies for sharing server resources. This relatively new technology allows businesses to outsource data storage, better analyze firm data and protect proprietary information.

Customizing and designing software in-house proves to be difficult for other companies to replicate. Thus, the quicker companies invest in proprietary information systems, the sooner they are able to realize profits. As a result, businesses are competing to procure the most talented programmers and data scientists. Companies investing early in software are gaining competitive advantage, and trending towards the success that hardware found nearly two decades ago.

Please see our May 16, blog, “The Risk of Missing out of Rising Markets.”

Tuesday, May 28, 2019

Caution signs in the data out the past week. Perhaps most pertinently, U.S. durable goods orders fell 2.1% MoM in April as expected. Nondefense orders and shipments — which are GDP proxies for monthly forecasters — were weaker than expected at -0.9%. For nondefense orders and shipments, the YoY growth rate is 2.5%, down from 13% 18 months earlier. The Markit PMI also slumped to 50.9 for the composite — a level consistent with growth below 2%. Slowing growth expectations can be seen from the bond market. Rather than just looking at the shape of the yield curve, consider that the whole curve (except for 30-year bonds) is yielding less than the Federal funds target rate of 2.38%. Historically, that has presaged a downturn in an average of 15 months.

Surprisingly, confidence measures remain strong, which could mean that the current lull is just the economy catching its breath after a fast move to the upside. While I support that idea, the canary in the coal mine for breaking trend growth to the upside is investment measures such as durable goods. The key for the future is higher productivity. With the labor force shrinking but confidence high, the final determinant will be capital formation. So far so good, but the data are suggesting a potential turning point.

Please follow business investment on page 71 of the Global Perspectives book.

Thursday, May 23, 2019

We think the market’s pessimism is overdone. It is clear to us that last year’s surge in earnings, right after the most significant tax cut in modern history, were not a high bar but the beginning of a new trend. According to Thompson Reuter’s Refinitiv, first-quarter 2019 earnings beat the prior year’s record by 1.4%. Certainly not remarkable growth but positive nonetheless. To paraphrase Mark Twain, reports of the death of increasing earnings are greatly exaggerated. This may have been self-evident once we observed the extraordinary first-quarter GDP print at 3.2%. It seems as though a government shutdown, a China–U.S. trade dispute and a market rout in the prior quarter was simply a “storm before the calm.”

Please review our 2019 Global Perspectives Forecast: The Storm before the Calm

Tuesday, May 21, 2019

Special Guest Blogger: Tim Kearney

There are various theories why the Federal Reserve is on hold, including economic weakness in the manufacturing sector and the recent risk-asset swoon. Each is important, but I’ll throw out there that the key for policymakers is the drop in the inflation rate. Officially, the Fed has two objectives: maximize employment and maintain a stable inflation rate, which is currently defined as 2% per year for the personal consumption expenditure (PCE) price index. That measure peaked at 2.4% in July 2018 and since then has fallen steadily. Currently, PCE is 1.5% — far below target.

That the Fed finds this to be an issue can be seen in the press release after the Federal Open Market Committee’s April-May meeting, in which the FOMC reminded the market that its target inflation rate is plus or minus 2%, implying that it is content to see the inflation rate move higher even though the unemployment rate is at a 50-year low. In prior cycles that would have prompted the Fed to keep its foot on the brakes, but not this time.

I’d say that the Fed has it right to allow the economy to run strongly for the first time in over a decade. In a recent speech, FOMC Governor Lael Brainard characterized “maximum employment” as “the highest level of employment consistent with” the 2% inflation target. That’s a green light for a lower unemployment rate and growth — good fundamentals for the equity market.

Please see Voya Global Perspectives page 39, “Monetary Policy Outlook.”

Thursday, May 16, 2019

Bearish investors can’t catch a break. The latest is President Trump’s declaration of a national economic emergency that bans “foreign adversaries” of technology firms that pose “unacceptable risks” to national security. What happens? Yes, the market soars — again. What is to worry about? S&P 500 corporate earnings continue to surprise on the upside with big box retailers leading the way; the Philadelphia Fed Manufacturing index rebounded today to a four-month high of 16.6; and Eurozone GDP stabilized at a 1.2% annual rate. Meanwhile, inflation readings are lower, sending mortgage rates to two-month lows.

We said before, don’t “Washington proof” your portfolio — focus instead on the fundamentals. Overly risk conscious investors are missing out on rising markets. Stick to the plan and follow the fundamentals.

Please see Voya Global Perspectives page 6 “Advancing Earnings Drive the Market.”


Footer content