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Wednesday, March 14, 2018

What a difference a week makes. It appears that a trade war is being mitigated, the economic data was out-of-sight (I do not much like the Goldilocks analogy, but…), and the markets seem to be digesting the resignation of Gary Cohn. Four important data points were published last week and all were positive: the jobs report, the accompanying wage report, the productivity report, and Fed data showed that household net worth is closing in on $100 trillion. To review the bidding: strong-moderate-better-strong.

Perhaps the best news was just how flexible President Trump proved to be on tariffs. It looks like Mexico/Canada will get a pass and there seems to be an opening for other countries to get a pass as well. The best news in the February non-farm payroll report was that the labor force participation rate (LFPR) rose to 63% – an increase of 0.3% – and the underemployment U-6 rate was flat at 8.2%. These two statistics are important to the concept of ‘slack’. Consider that the unemployment rate hit a low of 3.8% in early 2000, but with the LFPR about 67% and U-6 at 7.1%. That implies that the labor market could have more slack than it seems. The slack argument can be seen in the behavior of average hourly earnings slipping back to 2.6% YoY in February; not enough pressure for the Fed to guide the markets towards four hikes in 2018.

Ultimately, it’s about productivity, which was up 1.1% YoY in Q4 – up from zero in 2016 but still not a regime shift upwards. Sequencing will be tax incentives which spark a revival in capital investment that should begin to pay dividends in 2019 or so. This is the question of our time: are we heading back to the Historic Normal of good growth? - Special Guest Blogger: Tim Kearney

Tuesday, March 13, 2018

Voya Investment Management is proud to recognize Karyn Cavanaugh, CFA as an InvestmentNews Women to Watch Honoree!

Today, Voya Investment Management’s senior market strategist, Karyn Cavanaugh, is being honored along with 18 19 other female financial advisors and industry executives who have “advanced the financial services business through their leadership, passion, creativity and willingness to help other women along the way.” Karyn’s passion and creativity in communicating actionable investment ideas to investors has been the inspiration for Voya thought leadership focused on retirement planning for women.

Want to enhance your knowledge for client conversations focused on retirement planning for women? Click here for an article you can share with clients to help explain why women living longer means they have to save that much harder. Or, for more thought leadership on retirement investing, create a custom client presentation using charts and graphs from the latest Global Perspectives book.

Friday, March 9, 2018
Total payrolls, including all non-farm employment, have inched steadily upward with private job creation leading the way.

The non-farms payroll report was a blowout all around, so just take the rest of the day off and start the weekend early. The number of jobs added in February was 313k, far higher than the 220K expectations. Additionally, January and December tallies were revised higher by 54K. The jobs added to the economy were broad based with 61K jobs added in construction, but strong numbers were also posted in professional services, retail and manufacturing. Yes, the manufacturing sector added 31K jobs last month even without tariffs. The labor participation rate finally showed improvement, ticking up from 62.7% to 63% as 800,000 of the roughly 95 million Americans not included in the civilian labor force came back. Not surprisingly, the headline unemployment remained unchanged at 4.1% because of this increase in the civilian labor force. Despite the low headline unemployment number, there is still slack in the labor market. But what made this report even more spectacular was the tepid 4 cent/hour monthly wage increase to bring YoY wage gains to 2.6%. If you recall, it was January’s jump in wages to 2.9% YoY (revised to 2.8%) which ignited inflation fears and sparked a selloff. This report is confirmation that the pro-business policies are unleashing economic growth and while investors are quick to price in all the potential negatives (Fed aggressive action, trade wars, geopolitical tensions), they may be remiss in pricing in the positives. A 3 percent GDP economy is looking more likely every day. The sometimes fickle equity market knew a winner when it saw it, and turned significantly positive on the release of this data. Bond yields also moved up – not because of inflation fears – but because of higher economic growth expectations. Please track the number of jobs added to the economy on
page 63 of the Global Perspectives Book.

Thursday, March 8, 2018

The U.S. private economy got the biggest tax cut in 30 years – maybe in history – and the media yawns. Good news does not sell newspapers. Now for the bad news…Our pro-business president that has been hell-bent on removing government from impeding free markets is now inserting government back in with tariffs on aluminum and steel. The media is up in arms with provocative headlines such as:

  • Cohn Quits After Split with Trump – WSJ
  • Trump’s Tariffs Spark a GOP Rift – WSJ
  • Capitalism: Live by the Sword Die by the Sword – (Voya’s Doug Coté)
  • Where was the media when the tax cuts were signed into law, which had – and will continue to have – a much larger benefit to businesses? Tax cuts are the meat and potatoes. Yes, the peas (aka tariffs) detract from the dish, but hardly matter. What about the “retaliatory” tariffs that may spark a trade war? Already, Europe announced tariffs on peanut butter and cranberries. Well, that is frightening. Europe instead should focus on their competitive response to the astounding pro-business reforms from the U.S. They could start by slashing their income taxes across the board and then deregulate their strangled economies. The media hype is deafening but investors would be better focusing on the meat and potatoes and not the peas. Please listen what Doug Cote’s had to say regarding steel and aluminum tariffs on yesterday’s CNBC Squawk Alley.

    Wednesday, March 7, 2018

    Perhaps an unforced error from President Trump is the issue of tariffs and a trade war, coming at a time when data clearly point to a growing global economy with low U.S. inflation. The trade restrictions may have conveyed to our trading partners that the U.S. would be pulling back from freer trade. The economy is growing pretty well so why upset the markets? While it’s true that steel/aluminum are just some 0.2% of U.S. GDP, it’s the message, the risk of a trade war and the potential opening of the door to tit-for-tat responses that are the worry. There is some hope this might be an opening salvo in a long negotiation, the specificity of the tariffs (25% steel/10% aluminum) and that they are billed as ‘national security’ augur for their imposition. We can only know once the WTO takes a go at the tariffs but nota bene, presidents since Reagan have imposed some sort of trade restrictions and Trump did campaign on the idea. Still, history has shown that trade wars can hurt both sides. Yes, Nobel Prize winner Paul Krugman has posited that there is an ‘optimal tariff’ where a large buyer can find a modest tariff that forces sellers to take the tariff out of their margins. That is, the terms-of-trade benefit outweighs the (inevitable) distortion effects. However, that does not appear to be the case when tariffs are general rather than targeted. The early reading PMIs, though, were once again strong. U.S. ISM manufacturing hit 60.8, the first time above 60 in over a decade. New orders continue above 60. Prices paid continue to move higher but that could be in sympathy with higher oil prices. The non-manufacturing PMI Composite rebounded and hit 59.5. Global PMIs are showing continued good times, but with the USA moving to the top of the global league table.

    Tuesday, March 6, 2018

    The volatility zombie rose from the dead, creating investor fear. However, it is hardly a zombie apocalypse. What has been happening over the last six weeks is normal market movement and investors may have needed a little dose of zombie reality. The latest risk of a trade war is indeed real, although unlikely, and investors will wisely keep checking under the bed for potential market fallout. Panic and fear can drive investors to often make adverse knee-jerk reactions. Domestic equity ETF’s – which had been enjoying robust inflows – abruptly reversed course with massive negative net issuance in the weeks ending 2/9-2/23 despite corporate earnings at their highest levels ever and the market clawing its way back so that most major domestic indices tracked by ETF’s turned positive for the year. Active management also experienced a resurgence with managers in most major categories beating the index returns in February. After all, that is what asset managers do – manage risk. And they did it well during the latest market correction. Less efficient asset classes such as REITS, EM and International Equity, Bonds, and Bank Loans were areas in particular where active managers thrived on volatility but even large cap managers bested their indices. Investors should brace for continued volatility as the market digests tariff talk and possible rate hikes by the Fed. Skittish investors may find they need an active manager’s hand to hold. The long term average VIX (volatility index) level is about 20. It rose above 80 in 2008 and it is currently 18.9.

    Please review the VIX Index on page 25 of the Global Perspectives book.

    Media Alert: Please tune into to CNBC tomorrow at 11:30 a.m. to see what Doug Coté has to say about the current and future state of the markets.

    Friday, March 2, 2018
    Economic growth fuels demand for imports, aggravating the trade deficit, which plummeted in the great recession as demand dwindled. Exports have faced headwinds even as the U.S. dollar has weakened.

    Trade wars have the potential to destroy capital and punish markets. The Trump administration’s corporate tax cuts, deregulation, and an overall pro-business economic backdrop have unleashed growth. In a soundbite, this has greatly reduced the “tax” on conducting business. This – by any measure – has demonstrated the strength of the sword of capitalism.
    The economy and markets can also “die by the sword.” When government gets in the way of capitalism by “increasing taxes” – that is “trade taxes” – it can create confusion and unintended consequences. President Trump’s announced tariffs on steel and aluminum have the potential to be counterproductive.
    For historical perspective, the Smoot-Hawley Tariff signed into law on June 17, 1930 is credited with sending a recession into The Great Depression. The act raised U.S. tariffs on over 20,000 imported goods and inspired retaliation from Europe and other worldwide trading partners, obliterating global trade. Global trade is one of our tectonic shifts that I watch very closely and it is predictable and probable that this will lower global trade and with it global growth. This says nothing about how the users of steel and aluminum – mainly consumers – will be punished. President Trump and his advisors somehow think it was their efforts and not capitalism’s animal spirits that created this economy that has unleashed growth.
    For more on Global Trade, please take a look at page 46 of the Global Perspectives Book.
    Doug was warning about any trade tariffs which would adversely impact the market during last week’s Facebook Live event.

    Thursday, March 1, 2018
    The unemployment rate has slowly improved in line with economic growth; recent reports and news of job growth and payrolls have continued the favorable trend.

    While many investors are busy worrying about the possibility of inflation inching up (maybe), Fed Chair Powell's use of certain words ("overheat"), and celebrating Justin Bieber's 24th birthday (yay Biebs!), astute Global Perspectives followers will be focusing on more significant employment data. After all, it's jobs that really matter. Initial jobless claims fell to 210k - the lowest level in 49 years - in the week ending 2/24. Yes, this is just a weekly number, but it shows that employers are reluctant to lay off workers in this tight labor market. The unemployment rate is an ultra-low 4.1%, a seventeen-year low and lower than what had been considered full employment. Can it go lower? Yep. But, we still have some slack in the labor market with only 62.7 percent labor participation rate and more than 5 million potential workers with the ability to come back into the market. Jobs are what consumers care about and consumer spending is the biggest component of GDP. And we don't know how low unemployment can go, but it can go lower. Watch initial jobless claims on page 64 of the Global Perspectives Book.

    Check out Chief Market Strategist Doug Coté ringing the closing bell at the New York Stock Exchange.

    Tuesday, February 27, 2018
    New durable goods orders have made upward progress with surges and slumps along the way.

    Today, all investor eyes and ears are on Jerome Powell and his testimony to determine the likely course of interest rates. Well, the economy is strengthening, the jobs market continues to tighten, and inflation has been slowly inching up. So, the chances of getting some earthshattering intel from Chair Powell are slim. Interest rates will continue to gradually move up based on economic growth.
    Several years ago, we stated that Janet Yellen was not the Wizard of Oz. Neither is Jerome Powell. The Fed tried for years to lift rates but found that inflation refused to follow their yellow brick road and the yield curve had ideas of its own. Meanwhile, new durable goods orders fell 3.7% in January. The durable goods reading is often volatile, but it is a significant gauge of business investment, which is needed to increase productivity and is the key to sustained higher economic growth. Given the business incentives built into the new tax package, investors should expect this measure to be moving higher, not lower, in the coming months. Please keep an eye on durable goods orders on page 69 of the Global Perspectives Book and watch Doug Coté and Karyn Cavanaugh discuss the latest market insights.

    Friday, February 23, 2018

    The recent market volatility was especially concerning for retirees or near retirees who don’t have the benefit of a long time horizon to recover from market downturns. Financial advisors caution retirees to resist temptation to liquidate stocks after a large drop in the market because it prevents the ability to recover losses when the market bounces back. Advisors also suggest retirees minimize discretionary withdrawals during market meltdowns to mitigate sequence of returns risk. Investors need to create a reliable source of income to cover their fixed living expenses – a kind of paycheck that retirees can count on for what could be 30 years in retirement. Unfortunately, while social security is a retirement paycheck, it most likely will not cover all fixed living expenses. If fixed expenses are covered, variable or discretionary expenses like travel can be invested more aggressively for growth in equities without as much risk of derailing retirement. And by the way, the market has bounced back. The S&P500 is up more than 1.5% YTD and corporate earnings growth continues to be revised upwards for 2018 as the pro-business tax policies unleash economic growth. Please see an example of the risk of sequence of returns on page 91 of the Global Perspectives Book.

    In Case You Missed It: Watch what Doug Coté and Karyn Cavanaugh had to say during their February 22nd Facebook Live Event on Voya’s Facebook page.


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