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President Biden voted for continuity in monetary policy with his renomination of Jerome Powell to another four-year term as Federal Reserve Chair. He also elevated Governor Lael Brainard to Vice Chair, replacing Richard Clarida.
Some areas of the agenda were advanced, true progress may have been postponed to the end of 2022, when countries are expected to recommit or strengthen their net zero commitments, which currently fall short of limiting global warming to 1.5 degrees Celsius.
Rates have experienced some big swings recently, even though they have traded within a fairly narrow range over the past couple of months.
Looking forward, while we don’t yet know which of the previous periods the next cycle will best resemble, the market is currently pricing Fed “liftoff” in mid-2022, with a total of five hikes complete by the end of 2023.
From our vantage point, it seems like a given that the President will sign the bipartisan bill into law. Looking at the budget reconciliation package, a deal will get done but it may come down to the wire.
Investors should not paint all central banks with the same brush stroke as normalization will come in different shades: some central banks are already or close to being on the move, others will remain somewhat patient until next year, while others will remain firmly on hold.
Tapering is not tightening, and while purchases will slow in the months ahead, the balance sheet will still expand by roughly $400 billion from now until mid-2022 and settle at around $9 trillion.
Semiconductors have come into focus as one of the best examples of the supply constraints faced by the global economy.
Despite a slowdown in 3Q21 economic growth, corporate profits have been better than expected. Investors should use profits as a guide, as rising interest rates could pressure multiples and leave earnings as the main driver of returns.
As we emerge from this pandemic with inflation now rising at its fastest pace since the 1980s, the biggest question for investors is whether some of this inflation will prove “sticky”.
The last summit in 2015 resulted in the Paris Agreement, an international treaty addressing climate change mitigation (by aiming to limit the increase in global temperatures by 1.5 degrees Celsius above pre-industrial levels), climate adaptation, and climate financing. Therefore, we anticipate meaningful discussion on these topics: achieving net zero, fiscal efforts , climate financing, carbon pricing.
Recent economic data affirms China’s slowdown as the economy normalizes while still facing lingering pandemic obstacles and the consequences of its intentional long-term reforms.
While these fears were warranted following the near technical defaults experienced in 2011 and 2013 due to the same debt ceiling issue, by a narrow vote, the House raised the debt ceiling on October 12th by $480 billion to $28.9 trillion, averting a technical default.
While higher inflation and a recent slowdown in economic growth have stoked stagflation fears amongst investors, we continue to expect inflation to tame in the coming months.
Most investors seem to agree that technological adoption looks set to continue, but more and more we see people questioning the price they are paying for this exposure.
While it was expected that easing pandemic conditions would support demand for oil, the move in spot prices this year has caused investors to question whether these price pressures will persist and lead to higher inflation.
The result of the supply bottlenecks has been slower sales and inventory build-up than desired, depressing growth. In addition, the short supply of goods and services has led to higher prices, with input and output price indices accelerating at record speed this year.
From an investment perspective, elevated uncertainty will likely fuel additional volatility in both equity and credit markets through the first half of October.
Rising volatility reflects a broader distribution of outcomes – clearly, the events of recent weeks have forced investors to broaden their horizons and embrace a wider range of scenarios.
Chinese equities can still provide investors higher return and low correlation to other equity markets, while Chinese bonds can provide higher yields and low correlation to the global bond market.
The Federal Open Market Committee (FOMC) sent a slightly hawkish signal to markets on its monetary policy outlook, recognizing that the delta variant has slowed economic progress, but also that inflation may prove somewhat stickier than they previously assumed.
Sustainable investing, which considers environmental, social, and governance factors (ESG), is a philosophy most investors are aware of, but not all may fully understand it, as it has evolved meaningfully over the past few years
As we move into the final months of 2021, it has become increasingly clear that the private market momentum which began to build in the back half of 2020 has shown no sign of abating.
Due to pandemic-related unemployment, funding from payroll taxes is down, but this is expected to be temporary, so it shouldn’t set back the program significantly.
Until there is a resolution on the debt ceiling, net Treasury bill issuance is likely to remain materially negative in the coming month, putting continued downward pressure on short term interest rates.
As tapering moves to the forefront of policy discussions, investors should understand the mechanics of quantitative easing, how money is created and flows into the financial system, and the impact it’s having on financial markets.
With greater attention being paid to younger Americans by the investment management industry, financial professionals are increasingly curious about the what, why and how of Millennial money management.
Extreme weather has prompted policy makers to focus on more resilient infrastructure and investments to mitigate climate change, which has meaningfully exacerbated extreme weather events.
While a variety of different input costs have been rising, a shortage of semiconductors has led to tight supply and demand dynamics around the world.
Investing in China the right way is key: with a portfolio of companies, listed both offshore and onshore, with a manager that has a local presence and can do long-term fundamental analysis.
While it may be tempting to chase recent performance, we continue to anticipate that the second half will see interest rates move higher, repricing more in-line with the above-trend pace of economic activity that currently characterizes our forecasts. This should be supportive of cyclical assets broadly, and allow value to outperform growth.
This paper, written by Chaoping Zhu, discusses the Chinese new reforms and the subsequent selling pressure in Chinese equities, and what this means for investors.
The FOMC statement highlighted the continued improvement in economic conditions due to progress on vaccinations, but noted risks to the outlook still remain, largely reflecting the rise in cases over the past few weeks in unvaccinated communities.
It is reasonable to believe that at some point we will see the U.S. economy return to a trend pace of growth, and furthermore, it would not be surprising for the recovery to be a bit more uneven that was originally anticipated.
Understanding how to properly navigate conversations with Millennials and recognize the unique challenges that face younger investors today are important steps in building a successful relationship with the next generation of wealth.
Generational differences can present a challenge when navigating money management. Discover our best practices for making these conversations more fruitful.
One of the most prevalent concerns among investors today is where inflation is heading next.
After a sharp drop in 2020, global inflation is rising due to recovering energy, surging goods and normalizing services prices. This reflation signals building momentum in the global economy, a support for credit and equities, especially of cyclical regions like Europe, Japan, and EM ex-North Asia.
At the June meeting, the Federal Open Market Committee (FOMC) signaled a more hawkish stance towards its monetary policy outlook driven by a materially stronger growth and inflation outlook in the medium term.
The bottom line is that if inflation begins to rise, interest rates will rise, and valuations will come under pressure. So far, 2021 has been characterized by range bound valuations and rising earnings estimates, which has allowed the equity market to trend higher during the first half of the year.
Following the recession in the first half of 2020, U.S. equities rebounded quickly. Today, partly due to this and partly due to the strong domestic reopening story, U.S. equities make up roughly 79% of total investor equity allocation, just 20 bps shy of an all-time high.
Investors may want to focus on the intersection of valuation and historical volatility when positioning equity portfolios for what could be a bumpy ride this summer.
EM offers investors access to powerful structural growth stories of the expansion: technological innovation and the rise of the EM Asia middle class, themes that will come back into favor once investors look past the early cycle economic growth surge.
A disappointing April report suggested a combination of higher federal unemployment benefits, lingering COVID concerns, and remote schooling constrained job growth, but as many of these factors ease in the coming months, job growth should increase.
Regardless of one’s personal view, digital assets and cryptocurrencies are becoming an increasingly large part of the global financial system. As such, more and more investors are asking how they should think about them as both investments and currencies.
Looking ahead, European equities should stay supported given a substantial improvement in vaccinations, upcoming fiscal support, and a sizable valuation discount relative to the U.S. for a market that offers access to both the cyclical recovery and an inflation hedge.
The most successful companies of the past decade are not necessarily going to be the leaders of the next decade. Sustainability is likely to be a decade-defining theme, creating opportunities for the next generation of innovative companies.
How will higher taxes impact retirement savings? Explore how resilience to tax changes can maximize after-tax returns for better retirement outcomes.
Policymakers will be the key drivers of efforts to mitigate climate change, and given the urgency and sheer scope of the challenge, they will need to pull on all of the levers available.
With future domestic market returns constrained by heightened valuations, other opportunities must be sought out: international equities remain one of the best.
President Biden’s recently proposed American Jobs Plan outlines a robust strategy to rebuild the nation’s infrastructure, while also including significant funding for clean energy and affordable housing.
Achieving net zero carbon emissions will be no easy feat. It will require major innovation and investment. Therefore, it presents incredibly lucrative opportunities for the companies and countries that succeed.
While we cannot time the market, fundamentals remain supportive. With this in mind, investors saving for retirement should be positioned more aggressive in their allocations.
In general, there are three levers that a corporation can pull to boost return on equity – margins can expand, assets can be used more efficiently, or more leverage can be taken on .
All told, the post-COVID global recovery should help to sustain commodity performance in the near-term, a boon for investors looking to hide from inflation or diversify portfolios. However, it seems premature to call this anything more than a strong recovery.
After this year’s 18% correction in the MSCI China, valuations are now presenting a more interesting entry point. Over the next decade, China’s growing capital markets and its increasing size in the 60/40 portfolio is the most interesting development to watch.
2020 was an incredible year in the capital markets. However, in the wake of very strong performance for both stocks and bonds over the past 12-months, as well as the past decade, most traditional assets are looking expensive.
Active tax management is a way to take advantage of volatility. Volatility is a hallmark of the capital markets, but it also tends to derail investors and undermine their ability to reach their long-term retirement goals. While a diversified approach to investing is a good first step towards mitigating some of this volatility, plain vanilla portfolios may fail to generate sufficient rates of return going forward.
Inflation has been a hot topic amongst investors. Globally, inflation is expected to rise this year from 2020’s low levels. This reflation, a sign that the economy is operating above potential, should lead to strong earnings growth as well
Although we are not inclined to chase recent performance, it seems reasonable to expect that a more balanced approach to equity markets could help investors navigate what remains a very uncertain world.
Later this year, we expect the Fed to announce plans to taper its bond purchases, but EM is better positioned should a surge in real yields occur. In 2013, concerns centered on EM countries that had external vulnerabilities (such as large current account deficits), which left them particularly exposed to capital outflows.
For better or for worse, banks are required to meet various liquidity and leverage requirements. One ratio that measures a bank’s ability to absorb losses is the Supplementary Leverage Ratio (SLR). The SLR formula measures tier 1 capital, which consists mostly of common and preferred stock, as a percent of total leverage exposure.
Despite many other measures to help slow the spread of COVID-19, there is only one that can end the pandemic: broad global vaccination.
The Federal Reserve has made it clear that they are laser-focused on returning to full employment. One can only wonder if they will be looking for a durable rise in the overall participation rate, or whether they will take a more granular view and seek more equal progress across the gender spectrum.
The remainder of 2021 should see an acceleration in economic activity, rising inflation, and higher interest rates. In general, this dynamic should support the outperformance of value relative to growth, with attractive relative valuations acting as an additional tailwind for value outperformance.
The pandemic would always have demanded a dramatic response in terms of easy monetary and fiscal policy. However, policy responses have been shaped not just by the needs of the present but by the lessons of the past.
On March 5th, China began its most important annual political gatherings: the National People’s Congress and Chinese People’s Political Consultative Conference. These events highlight the central government’s priorities for the year ahead, with 2021 also a year with a new Five Year Plan (FYP).
The March 4th OPEC+ meeting passed with more fanfare than is typically associated with the organization’s biannual summit. As is normal, OPEC countries, led by Saudi Arabia, met with key non-member states to discuss output changes.
The pandemic has presented many challenges for working parents— simultaneously managing full-time jobs, supervising children’s remote learning, and tackling household chores, with fewer options for outside assistance.
Given the modest back-up in yields over the last several months, many investors are wondering if, and how, the role of fixed income in a portfolio might change moving forward.
Comparing the recoveries of the global financial crisis (GFC) and the pandemic recession is like comparing the tortoise and the hare: the aftermath of the former was slow and steady, while the latter should experience a burst of speed ahead.
Among the many considerations the Federal Reserve has to take in managing monetary policy, the behavior of the Treasury Department can be one of the more challenging. The Treasury Department holds its cash on deposit in the Treasury General Account at the Fed.
Most investors believe that the reflation trade will define markets in 2021. However, more and more clients are asking us what could undermine this narrative and precipitate a market correction.
A key behavioral misstep investors should always avoid is trying to time the market, and 2020 showed just how detrimental timing the market could be.
Investors should always look forward: a new global economic cycle is beginning in which international can take the baton from the U.S.
The financial stress of 2020 forced many people to tap retirement savings. Explore how emergency reserve funds could have protected retirement strategies.
Following several consecutive announcements of vaccine candidate success in November 2020, markets began pricing in an end to the COVID-19 pandemic.
Markets saw retail investors pile into highly-shorted, small cap equities in an effort to push back on the institutional investment community
Investors in 2020 recognized the challenges posed by the pandemic, but believed that with patience, policy support, and a bit of optimism, they would eventually get to the other side. The final earnings reports of 2020 are now being delivered, and the investment community can shift its focus from climbing the mountain to the descent.
In the end, were there any V-shaped recoveries from the COVID recession? There is only one example around the world: China.
Most investors are familiar with the return challenges they may face in the years to come. Elevated equity market valuations and historically low interest rates have led us to forecast that a 60/40 portfolio of global equities and high quality U.S. fixed income will return 4.2% annually over the next 10-15 years.
Inauguration day starts the clock on the first 100 days of a new administration, a symbolic benchmark period to measure early success. During the first 100 days, we anticipate another fiscal package, a pivot on foreign policy, trade and regulation, and a preview of future recovery spending.
Treasury yields have climbed above 1% and investors are asking how much higher Treasury yields could climb in 2021.
With U.S. federal debt at 100.1% of GDP, the highest since World War II and rising, investors wonder what the breaking point could be.
In the first week of January, two Democratic challengers defeated Republican incumbents in the state of Georgia’s senatorial race, bringing an end to a hotly contested runoff election and solidifying the Democratic hold of both chambers of Congress and the White House.
2020 ended with a depreciation of the U.S. dollar, as 2021 begins, investors wonder: will the U.S. dollar continue to fall?
2020 is a year that nobody will forget, characterized by the rapid spread of COVID-19, an aggressive policy response, and over the past few weeks, the distribution of vaccines that many hope will bring an end to the pandemic in 2021.
Coming into the final quarter of 2020, we expected that U.S. economic activity would slow from the torrid pace seen during the third quarter.
2020 will be remembered as the year of the pandemic, while 2021 promises to be the year of the vaccine.
Rapid evolution of strategies available under the sustainable investing umbrella has subjected SI perceptions to anchoring bias.
Bitcoin and other cryptocurrencies went into hibernation for a number of years. In 2020, however, cryptocurrencies have come roaring back.
Investors received positive news about the trials of three COVID-19 vaccines, giving them the freedom to look ahead at the broadening of the global recovery
Last week, researchers at the Atlanta Federal Reserve made waves when they released an updated “nowcast” for 4Q 2020 GDP growth.
The spread of the coronavirus and its impact on global economic activity has materially changed the investment outlook for 2020. In this piece we provide a framework for tracking infection rates globally and monitoring the impact on economic activity.
Many investors find this disconnect between the equity market and the economy perplexing and are constantly asking us: is it justified?
While fundamentals– valuations, earnings and economic growth – dominate in the long run, the short run is a different matter.
Ultimately, how high the unemployment rate gets is dependent on one key question: will American small business fire its workers, says Manley.
Initial claims for unemployment insurance surged to the highest level ever: 3,283,000, spiking from a slightly revised 282,000 last week.
This paper, written by Dr. David Kelly, reviews the U.S> relief bill and its investment implications.
The U.S. Federal Reserve (Fed) has pulled out its alphabet bazooka in an effort to ensure sufficient liquidity and the smooth functioning of financial markets, while also providing credit to businesses that are affected by the spread of COVID-19 and the stall in global economic activity.
As economists continue to revise down their 2020 GDP estimates, a lot of clients have been asking us about the potential impact on earnings.
This past Sunday, the U.S. Federal Reserve (Fed) fired a last desperate salvo in an attempt to stabilize financial conditions, the second emergency inter-meeting cut in two weeks.
Coming into this year, we expected an improvement in global economic growth, as 2019’s policy uncertainty clouds dissipated.
The COVID-19 crisis confirms, once again, the value of a diversified portfolio, says David Kelly.
It is important to avoid trying to predict the future; rather, clients are best served by monitoring the present situation and maintaining composure.
Even with this Fed action, there will likely be calls for fiscal action to support to businesses suffering from the response to virus fears, says David Kelly.
See the potential impact that various recovery scenarios may have on client portfolios.
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