On the Minds of Investors
Drawing on the depth and breadth of their market and economic expertise, our global macro strategists offer insight into today's big investment themes to enable more confident portfolio decisions.
The Federal Open Market Committee (FOMC) voted unanimously to raise the Federal funds rate target range by 0.75% to 3.00%-3.25%. The tone of the committee remains hawkish given policymakers are “highly attentive” to taming inflation that runs well above its 2% target.
The housing market has had a difficult year. Mortgage rates have skyrocketed from 3.1% to over 6.0% and home prices are up 18% year-over-year. As a result, housing affordability has been crushed leading to a sizeable decline in single-family housing construction and mortgage origination activity.
We still believe headline inflation has peaked on a year-over-year basis, but more clarity on the trajectory of inflation will be key in order for interest rate volatility – and therefore capital market volatility broadly – to decline. The Fed looks set to continue raising interest rates in a fairly aggressive way through the end of 2022, and potentially into 2023 if inflation proves stickier than expected.
At first glance, a “strong U.S. dollar” may seem like a positive. There are advantages: overseas trips are cheaper for U.S. tourists and foreign goods are cheaper to import for U.S. companies and consumers (helping bring down elevated inflation). However, important disadvantages exist: U.S. exports are more expensive for foreigners and foreign earnings of U.S. companies are dragged lower.
President Biden’s announcement on a set of changes to student loan repayment has generated several questions from clients. The most common boil down to: How will student debt relief impact consumers? Will the deficit impact lead to a further rise in inflationary pressures? And, is it likely to be passed?
Coming into 2022, investors expected that a healthy consumer – supported by significant fiscal stimulus during the pandemic – would power the economy at an above-trend pace. While this was indeed the case at the start of the year, a series of idiosyncratic factors pushed aggregate growth into negative territory.
In the short-term, rate hikes may pressure EM equities, but not as much as investors may think due to: lower vulnerability to capital outflows, high interest rate differentials limiting outflows, and a greater dependence on China’s cycle versus the Fed.
The tax on buybacks will be particularly relevant for equity investors given the role share repurchases played in enhancing profit growth during the post-GFC cycle. The big question is whether or not this buyback tax will lead companies to reduce share repurchases and increase dividend payments going forward.
This week, the Inflation Reduction Act (IRA), a legislative package that includes climate spending, prescription drug pricing reform, and tax reform, was signed into law. The IRA represents a meaningful commitment to climate goals and should reduce the deficit over the next decade but is unlikely to reduce inflation and will weigh on 2023 profits.
The broad takeaway is that economic conditions are softening globally, and aggressive central bank tightening is contributing to it. The global economy could avoid a recession if a stronger recovery emanates from China in the second half of 2022, and a soft landing is achieved in regions like the U.S. and Europe, however, that outcome looks increasingly challenging.
There are three roles that alternative investments can play in a diversified portfolio – they can provide income, diversification, or enhance returns. Importantly, these are not mutually exclusive; some alternatives – like core real assets – can provide a combination of both income and diversification.
For investors, further tightening is ahead; however, a data-dependent committee suggests an increase in the federal funds rate to above 3.5% in this cycle is now less likely.
Since emerging from the Financial Crisis, a 60/40 portfolio of U.S. stocks and bonds has earned a whopping 11.5% average annual return. However, 2022 has been a particularly challenging year for the 60/40, which declined 16.1% in the first half of the year.
What has not come into question is whether investors will need alternative sources of income and diversification. As such, it seems increasingly likely that private real estate will be part of the broader investment conversation in the years to come.
Looking ahead, we recognize that recession risk has risen. That said, it seems premature to make a call that we are already in recession today.
The tragic war in Ukraine has led to an indiscriminate sell-off in European equities. While headlines weigh on sentiment, the 1Q earnings season was strong for Europe.
Many of the innovations and technologies needed for a carbon neutral economy are not yet available, but there are still many existing solutions that can be implemented today to reduce emissions, particularly in how we manage energy efficiency in buildings and appliances.
For investors, the Fed has laid out a hawkish path for rate increases with the intent to front load rate hikes. With such aggressive tightening this year, recession risks have risen further in 2023.
Even as QT commences, long-term rates are likely to trade range bound between 3.00%-3.5% and be little impacted by balance sheet reduction at first. That said, as bank reserves decline to levels that may restrict bank activity, markets will likely signal the Fed may need to change course.
While rising interest rates and a more hawkish Federal Reserve (Fed) help to explain what has gone on with valuations, it was not as clear why earnings estimates continued to move higher. Interestingly, however, companies have begun guiding earnings expectations lower in recent weeks, as it appears too difficult to continue ignoring rising costs and economic growth that is decelerating back toward trend.
Long-term investors are facing a number of challenges today. Multi-decade-high inflation is eroding purchasing power and portfolio values, and recent volatility across capital markets has made the investment landscape look perilous.
The spike in yields through the first five months of this year has led to some very ugly returns in fixed income.
The US economy is showing signs that the post pandemic surge is beginning to moderate, but we do not think a recession is imminent. Nonetheless, stocks are near correction territory, consumer sentiment has soured to levels last seen in 2011, geopolitical tensions are elevated, and prices are higher everywhere; all of which challenge this view.
Progress on mitigating climate change hinges on cleaner energy as 73% of global greenhouse gas emissions come from energy usage in industry, buildings, and transport.
The war in Ukraine is causing surging commodity prices, COVID lockdowns in China are exacerbating strained supply chains, and 40-year-high inflation has prompted the Fed to aggressively tighten monetary policy. Together these dynamics are also creating uncertainty about future growth.
The Year of the Tiger was expected to be a year of stabilization for China’s economy and of recovery for its equity market, following last year’s tough Year of the Ox. However, instead of positive surprises, investors have continued to grapple with uncertainties, both new and old.
At the end of the day, 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.
At its May meeting, the Federal Open Market Committee (FOMC) voted to raise the Federal funds target rate range by 0.50% to 0.75%-1.00% and signaled similar 50 basis point rate increases would be on the table for the next couple of meetings.
Since the onset of the pandemic, global supply chains have been stressed, weighing on economic growth and lifting consumer core goods inflation. Supply chain issues had seemed to peak in December, with some encouraging improvement in the first two months of 2022.
Although climate change is a key consideration in sustainable investing, sustainable investing is more broadly about finding companies that are durable in the long run and identifying risks that traditional company analysis may not capture.
U.S. home prices have experienced incredible appreciation over the last decade, with particular strength in the years since the COVID-19 pandemic outbreak.
The first thing most of us learned as children about protecting the environment was reduce, reuse, recycle. Those enduring principles are particularly relevant for companies looking to reduce their environmental footprint and their costs.
With financials kicking off the first quarter earnings season this week, our current estimate for 1Q22 S&P 500 operating earnings per share (EPS) is $51.01 ($42.80 ex-financials), representing year-over-year growth of 7.6%.
The March employment report showed that the U.S. economy continues to recover in the aftermath of the COVID pandemic, with the labor force exhibiting signs of multi-generational tightness.
2022 has seen a volatile start, with many of the growth names that performed well in the initial stages of the pandemic – as well as over the prior cycle – under pressure.
Over the last 15 years, international equities have underperformed U.S. equities by a cumulative 270%. Currency played a role in this underperformance, subtracting 25%, as foreign currencies steadily weakened against the U.S. dollar.
One of the most critical levers to reduce carbon emissions globally is transportation. Transportation accounts for 16% of global greenhouse gas emissions, with nearly three-quarters coming from passenger travel and road freight.
One of the most critical levers to reduce carbon emissions globally is transportation. Transportation accounts for 16% of global greenhouse gas emissions, with nearly three-quarters coming from passenger travel and road freight.
2022 will likely remain volatile for equity markets, as central banks normalize alongside persistently hot-inflation and geopolitical issues result in prolonged uncertainty.
Last week marked the best week for U.S. equities since November 2020, with the S&P 500 erasing almost half of its year-to-date losses. The S&P 500 is now only down 6.4% versus its max drawdown of 13% in 2022.
For the first time since December 2018, the Federal Open Market Committee (FOMC) voted to raise the Federal funds target rate range by a ¼ percent to 0.25%-0.50% at its March meeting and made clear further increases would be appropriate to tame inflation.
Emerging market (EM) equities are underperforming for a second year, down -16.4% year-to-date after last year’s -2.2%.
Before Russia’s invasion of Ukraine and its impact on commodity markets, we thought inflation might finally see its peak in February.
An inverted yield curve driven by short rates rising more than long-term yields has preceded every US recession since 1960 and is therefore a closely watched metric among investors regarding the outlook for the economy and markets.
While geopolitical tensions have reached a boiling point overseas, American investors have recently faced a set of potentially market-moving events at home: President Biden’s first State of the Union address and Federal Reserve Chair Powell’s testimony in front of Congress on monetary policy.
Despite the horrible human and social impact, the conflict in Eastern Europe is currently noise for the market. Time will tell how things evolve, but the key risk is that higher commodity prices – and energy prices in particular – fail to be transitory.
Geopolitical tensions involving Russia and Ukraine have been a source of market volatility, especially since February 11th when President Biden warned there was a “very distinct possibility” of a coming Russian invasion of Ukraine.
Since the start of the year, markets have meaningfully repriced expectations for rate hikes from the Federal Reserve (the Fed) this year; projections have risen from 2-3 25 basis point (0.25%) increases to 6-7 currently.
The coexistence of food waste and world hunger reflects a classic market failure. About 17% of food goes to waste globally, and yet an estimated 690 million people (8.9% of the world population) are undernourished.
In both a U.S. led boom-bust recession and global synchronous growth, international equities could outperform, suggesting a key role for the asset class in portfolio construction.
Time and time again, investors get caught up in the good times and buy an asset when its price is inflated, only to turn around and sell it once optimism has receded and the price has fallen.
Retirement income can be a challenge for many advisors, and advice given to clients has often relied on rules of thumb based on assumptions of how households spend post-retirement.
Regulatory action on carbon emissions is likely to intensify over the coming years, and companies that are actively addressing these risks could have a competitive advantage in the future.
2021 was a year of steady reform introduction by Chinese authorities, focused on the long-term goals of improving the quality of growth and on addressing non-economic priorities like inequality, leverage, and decarbonization.
Fixed income can still play defense during periods of market turbulence and investors would be wise to maintain exposure through a more active approach as rates grind higher.
After a rocky start to the year, a number of major U.S. equity markets are in or near correction territory.
There are plenty of opportunities across the alternative investment landscape. However, any allocation to alternatives should be outcome-oriented.
2022 and beyond should present investors with those in the form of above trend international growth and stabilization in China.
There was no shortage of market catalysts to begin December, with the emergence of the Omicron variant and hawkish comments from Federal Reserve (Fed) Chair Powell stirring the markets.
2021 was a better year than expected for U.S. equities, as a 34.5% increase in earnings expectations offset a 7.6% decline in valuations, leading to a price return of 26.9%.
This week, hopes of passing the Build Back Better (BBB) Act, the climate and social spending package, were dashed when Senator Joe Manchin of West Virginia said he would not vote for it due to concerns over further stoking inflation and increasing the national debt.
Although lockdowns and restrictions may drag on economic activity in the near term, we see three key drivers of economic growth in 2022.
It is key that employers innovate the employee experience for younger professionals. Explore how employer-sponsored plans can better serve young adults.
Overall, investors should be prepared for an active Fed over the next few years. We expect the Fed to begin raising rates in June, and deliver one hike per quarter thereafter.
The November CPI report showed consumer prices rising at their fastest pace in nearly 40 years as surging gasoline prices, vehicle prices, and owner’s equivalent rent continued to drive inflation upwards.
Although risk assets enjoyed positive returns for most of November, the emergence of a new COVID variant and a hawkish pivot from the Fed prompted a risk-off environment to close the month, with investors positioned accordingly.
Volatility has come roaring back, with the S&P 500 seeing its worst 2-day performance in over a year and the VIX back above 30 for the first time since February.
It is now becoming clear that Chinese policy makers no longer focus exclusively on the quantity of growth, but also on its quality. In addition, several other policy goals are taking priority as well, such as deleveraging, decarbonization, common prosperity and public health.
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.
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.
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.
While many changes are likely to emerge, one clear trend, with far-reaching macro and market implications, is the increase in leverage, says Azzarello.
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.
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.
The S&P 500 has marched steadily higher from its March 23rd low against a backdrop of investor skepticism. In previous posts, we have discussed how this rally is being driven by three things.
The balance sheet of the U.S. Federal Reserve (Fed) has increased by 2.9 trillion USD since the start of March, meaning that in just over eleven weeks it has grown more than it did in the five years following the Financial Crisis.
Year-to-date, emerging market (EM) equities are down -17.6%, as a combination of the COVID-19 recession and the oil price shock has led to downward revisions to earnings expectations, as well as weaker currencies relative to the U.S. dollar.
Global markets have roiled in the face of COVID-19 and social distancing, and many investors are looking to “pick up the pieces,” eagerly hunting for the next big opportunity.
Earlier this week, oil prices turned negative for the first time in history, with WTI trading as low as -$37 a barrel.
Over the past two months investors have digested the COVID-19 shock: the fast spread of the virus around the world, the social distancing measures implemented and the resulting economic and earnings recession.
1Q20 earnings season will provide an important first look at how the ongoing pause in global activity is impacting corporate earnings.
The industries most impacted by social distancing account for 20% of payroll employment, and consumer spending across those industries account for 20% of GDP.
Today’s objectively complicated credit market may be an excellent source of future portfolio growth, says Dryden.
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.
There is not a clear answer. However, what we can provide perspective on, is where we are finding value, according to David Lebovitz.
Former Vice President Joe Biden made a surprise comeback during the Super Tuesday contests, paving the way for a two-person race to the Democratic nomination.
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.
Equity investors spend a lot time looking for where earnings growth will be strong; what doesn't get as much attention is what happens after they're generated.
Taken at face value, the fall in job openings is concerning and warrants careful monitoring.
Financial markets have fallen sharply on concerns of the coronavirus, a respiratory illness first identified in Wuhan, China, spreading globally.
Equity market valuations have risen substantially in recent months, with the forward P/E ratio of the S&P 500 now at a level of 18.6x.
Investors are now asking whether inflation could return, threatening the rally in financial markets.
Buying the dip - the coveted strategy (almost) all investors like to employ.
Rising geopolitical tensions with Iran have led to some fears over potential oil supply shocks out of the Middle East.
Rising geopolitical tensions with Iran have led to some fears over potential oil supply shocks out of the Middle East.
Chief Global Strategist
Global Market Strategist
Global Market Strategist
Global Market Strategist
Chief Retirement Strategist
Chief Global Strategist
Global Market Strategist
Global Market Strategist
Global Market Strategist
Chief Retirement Strategist