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After well over a year of anxiously anticipating an economic recession, the U.S. economy continues to look sound. However, as we enter the “fall of worry” there are several risks on the horizon this autumn: impacts from the UAW strike, rising oil prices, the resumption of student loan payments, and the potential for a government shutdown.
As widely anticipated, the Federal Open Market Committee (FOMC) voted to leave the Federal funds rate unchanged at a target range of 5.25%-5.50% at its September meeting.
Last quarter, 40% of S&P 500 companies mentioned artificial intelligence (AI) in their earnings calls – more than double from a year earlier – and their collective investments in AI are exploding.
With the possibility of tighter financial conditions going forward, investors may be well served by looking for any signs that tighter conditions are beginning to weigh on activity.
Over the long run, duration will be an investor’s friend for both asset classes: not only will lower rates push bond prices higher, but a lower opportunity cost of owning equities and easy monetary policy should allow valuations and earnings expectations to move higher.
While what happens in China will continue to influence growth, sentiment, and performance in the broader EM universe, powerful structural and cyclical themes can lead to differentiated performance.
We expect a slower growth and cooling inflation environment will allow the Fed to gradually reduce rates next year, thus stabilizing real yields and potentially biasing them lower.
With many parents (and investors!) taking the end of summer to be with their families and go to the beach one last time, kids are not the only ones who need a refresher before they head back to the classroom; in today’s blog, we try to help parents get ready to go “back to school.”
2023 has seen more office conversion activity – while sometimes this can be easier said than done, it does suggest that there is an evolving opportunity in the office space for investors who can deploy additional capital.
India’s smaller share in global manufacturing exports and its lower dependence on the China reopening story helps to explain its strength versus other export-oriented Asian economies’ struggles.
While the probability of a soft landing has risen given the generally strong incoming data, the concern is that most leading indicators continue to point to recession.
The rally in corporate credit may have caught some investors by surprise given the consensus that a recession would materialize this year, a historically bad environment for credit spreads.
Looking back at the past six U.S. stock market declines greater than 10%, international has not always sold off more. In some instances, it has performed in line or even better.
This combination of resilient growth, better than expected profits and enthusiasm around artificial intelligence has led to a strong rally in U.S. equities so far this year.
The likely cause for declining oil prices is increased U.S. production, which is expected to reach an all-time high in 2023.
While the Fed may need some more convincing over the next two meetings, it seems reasonable to expect this tightening cycle will end this year.
It would not be surprising to see a more notable re-rating in valuations later this year or in early 2024; this, in turn, will create opportunity for both primary and secondary market investors.
Beneath the surface are two market dynamics: the megacap tech stocks, which account for the lion’s share of positive market performance year-to-date, and everything else.
The combination of slower economic growth, higher interest rates and tightening credit conditions are likely to weigh on CapEx and could be the thing that tips the U.S. economy into a mild recession.
Fundamentals differ significantly at the sector level. For example, office remains the weakest sector, as vacancy rates remain elevated, and firms struggle to fully exit remote working.
Today’s announcement made it clear that the committee still needs more compelling evidence that inflation is under control and could very well tighten at least once more this summer.
While labor market conditions may have had some effect on pushing up services prices, we think its impact is overstated. Over the last 4 months, more than half of the year-over-year gain in core services ex-shelter inflation has come from transportation services alone.
Core infrastructure continues to represent a way to generate income without taking on more equity risk, while proactively hedging portfolios from the chance that inflation is harder to tame than many currently expect.
Although rates have risen across the curve in recent weeks due to debt ceiling uncertainty, more hawkish Fed expectations, and resilient economic data, the overall macro landscape is one of slowing growth and receding inflation.
In real estate, industrial asset valuations have barely flinched given low vacancy rates and rising rents, whereas the office space has seen (and is expected to see) further pain as we determine what the future of work will look like.
Given the rapid tightening from the Federal Reserve, property values are likely to be marked down in the quarters ahead impacting loan values on bank balance sheets.
This combination of lower rates, higher equity valuations, and declining earnings – with a potential recession on the horizon – leaves us cautious on the equity market at current levels.
A pause from the Fed is certainly welcome from a broader macro perspective, but the challenges facing local and regional banks in particular, are still prevalent.
For Americans planning for retirement, the obvious implication is to save and invest more. Beyond this, it has become increasingly necessary to have some assets outside of traditional 401(k)s and IRAs.
The U.S. reached its debt limit of USD 31.4 trillion on January 19th and has since been relying on funds in the Treasury General Account (TGA) and so-called “extraordinary measures” to fund its obligations.
The statement language has shifted from “ongoing increases will be appropriate” to a data-dependent approach “in determining the extent to which additional policy firming may be appropriate”, hinting the committee is ready to pause rate increases.
After an initial rally of 60% from late October to late January, Chinese equities have corrected 15% and are now down marginally for the year.
The bottom line is that performance in U.S. equity markets so far this year has been all about rates, a theme that should persist as earnings expectations gradually align with reality.
The first estimate of 1Q23 real GDP showed the economy grew at a 1.1% annualized rate, below the consensus expectation for 1.9% growth.
Moreover, many banks stepped away from riskier lending in the aftermath of 2008, creating an opportunity for private credit firms and other direct lenders to increase their market share.
Those waiting for a pick-up in unemployment to signal a looming recession or that the Fed can finally declare victory may be too late.
These financial institutions would incorporate FedNow into their existing transfer infrastructure, so consumers, businesses and non-bank payment providers would use the system indirectly, rather than treat it as a third-party application.
The key point, though, is that much of the “stickiness” that has been ascribed to core services may largely reflect the lingering hangover of supply chain issues, where Fed policy has little impact.
As the Fed ponders its next step, investors should be mindful that the window of opportunity that has emerged in fixed income may slam shut quickly.
The bottom line is that performance in U.S. equity markets so far this year has been all about rates, a theme that should persist as earnings expectations gradually align with reality.
However, with a potential recession on the horizon and vulnerabilities in the financial system, investors ought to be selective, gearing towards the highest quality areas of the bond market.
In the statement, the Federal Reserve (Fed) acknowledged the potential implications of banking turmoil on the economic outlook but highlighted that at this point, it’s uncertain how big that impact will be.
However, we seem to be at the beginning of a turnaround given the change in the international growth and interest rate backdrop, together with a potential shift in market leadership.
Putting aside the obvious implications of the above – namely uncertainty and, in turn, volatility – it would be wise to also consider what this means for the March Federal Open Market Committee (FOMC) meeting.
This highly anticipated print was overshadowed by the fallout from regional bank failures, which could also impact how the Federal Reserve (Fed) approaches its March rate decision.
With the U.S. housing market struggling under the weight of higher mortgage rates, higher home prices, and limited supply, more and more questions have been coming in around the outlook for commercial properties.
While uncertainty remains about the cyclical path of U.S. policy and growth, the picture has gotten much clearer (and more positive) in China since late 2022.
The recent surge in inflation has been driven by both demand and supply factors as fiscal stimulus and low rates supported a boost in demand, while lockdowns put significant pressure on supply chains.
In general, these concerns remind us that the government’s monthly jobs report should be seen as just one piece of the broader labor market mosaic.
Learn whether rising interest rates could cause a housing market crash and what it means for consumers.
By the second half of the year, growth is likely to slow as the cumulative effects of higher rates are felt and inflation moderates as food and shelter consumer price index (CPI) soften.
Ultimately, the conversation around cash and traditional long-term assets should not be framed as “either/or”, but rather as “both, for different reasons.”
Several pro-growth changes occurred late last year that investors should not ignore: support to the real estate sector, conclusion of the regulatory review of the internet sector, dialing down of geopolitical tensions – and crucially, a changing of the “Zero COVID policy".
Markets had largely expected the uptick, but the underlying components showed a more mixed inflation picture compared to the broad-based declines seen in prior months.
Although financial conditions are tighter now than in early 2022, they have retreated significantly in recent months.
The next decade is likely to be characterized by more “normal” inflation. As a result, not all recent central bank rate hikes will be unwound - the era of free money is over.
The statement language and press conference were somewhat dovish.
Importantly, however, significant valuation dispersion suggests that as investors gain more clarity about the health of the U.S. economy and trajectory of inflation and rates, small caps could lead the charge as we embark on the next bull run.
2022 was a year to forget in the capital markets. Stock/bond correlations turned positive and left traditional investors with nowhere to hide as volatility spiked and prices plunged.
Compared to the past decade, bond yields across every major sector are above their ten-year median.
To have a clear view on where inflation may be heading, it is therefore worth understanding how the rental market is faring.
Looking ahead to 2023 we see slower growth, a gradual deceleration in inflation, and monetary policy that remains tight; as always, this will create risks, as well as opportunities, across the spectrum of alternative investments.
For investors, we anticipate a slowdown in economic growth and inflation should bring bond yields lower, but debt ceiling risks, although certainly not our base case, could derail the bond market recovery and foment significant volatility if realized.
Operating leverage, which is the relationship between changes in revenue and changes in earnings, continues to be key for profitability.
Current data suggest three realities: inflation is cooling; job growth remains firm, but is likely to moderate, as will wage growth; and services and manufacturing data point to broader economic slowing.
China’s resumption of normal manufacturing activity should continue to support supply chain normalization, maintaining global inflation on its cooling trend.
For long-term investors, buying the dips – in both stocks and bonds—could become attractive in 2023, and diversification could stage a comeback.
2022 was a roller coaster for investors with Russia’s invasion of Ukraine challenging global energy supply, central banks pivoting aggressively to combat high inflation, fading, yet still widespread effects of a global pandemic impacting consumers, businesses, and supply chains, and elevated political uncertainty shifting the landscape of economies globally. In summary, 2022 was a volatile year.
The past few weeks have seen much ink spilled on 2023 outlooks, with strategists and analysts suggesting an increased likelihood of recession next year as the consumer begins to show signs of stress at a time when the Federal Reserve (Fed) has signaled there is more room for rates to rise.
As widely anticipated, the Federal Open Market Committee (FOMC) voted unanimously to raise the federal funds rate target range by 0.50% to 4.25%-4.50% at its December meeting.
November’s CPI report showed a second month of softening inflation despite still-elevated price growth. Headline CPI increased 0.1% month-over-month (m/m) and 7.1% year-over-year (y/y), while core CPI (ex-food and energy) increased 0.2% m/m and 6.0% y/y, all below consensus expectations.
Today’s investing landscape is dominated by a sentiment that may seem odd at first glance: namely, that good news is bad news. More specifically, good news for the economy is bad news for the stock market.
International equities are down -13.6% year-to-date (in U.S. dollars), with multiple contraction and weaker currencies dragging on returns, as investors price in higher rates and more uncertainty about fundamentals.
The prevailing economic resiliency coincides with softening inflation, which gives the Federal Reserve an opportune window of slowing inflation but solid growth to tighten monetary policy to an appropriately restrictive stance and maintain that level for a period of time before growth starts to bite.
Numerous data suggests the US economy will enter a recession in the next 12 months; 46% of professional forecasters in the Philadelphia Fed Survey project a recession, the Conference Board recession probability model predicts a 96% likelihood of recession, and the U.S. Treasury yield curve is deeply inverted which has been a decent predictor of prior recessions.
For many investors, the “pivot” promise from October’s CPI print elicited a sigh of relief. Given that stock prices are higher, bond yields are lower and the dollar has softened in the weeks after the inflation reading, it would appear that markets have reached a turning point.
Markets often rally after elections, and the 2022 midterms were no exception with markets up 5.9% during election week. In the future, market prognosticators will point to this as another data point confirming the pattern of post-election rallies.
The start of this month saw the release of our 2023 Long-Term Capital Market Assumptions, where we forecast economic growth, inflation, and asset returns over a 10–15-year horizon. The current report stands in stark contrast to prior years, which were characterized by a relatively muted outlook for returns from both stocks and bonds.
There's still a question of whether the Fed will allow its policies to work their way through the economy, as there is still a risk that they knock the economy into a recession to combat an inflation problem that, based on this report, is receding on its own.
2022 has been a year of remarkable volatility across asset classes. Stocks, bonds and cryptocurrencies have been rocked by a confluence of challenges that could be described as a “perfect storm.”
The third quarter saw yet another decline in the S&P 500, as concerns that higher rates and tighter monetary policy would weigh on economic activity and earnings remained top of mind for investors. While the rally in October has been refreshing, it seems unlikely it is the beginning of a new bull market; investors are looking for signs of a pivot at the Federal Reserve (Fed), whereas best case they will get a pause.
The committee’s tone remained hawkish and inflation-vigilant, but investors took initial relief at new statement language acknowledging the significant amount of tightening the Federal Reserve (Fed) has already delivered and the lags with which it will affect the economy and inflation.
The 2022 midterm elections are just days away and many investors are wondering how these elections may impact their portfolios. Although many investors fear the impact of politics on their portfolios, history shows election-related market volatility is typically short-lived and it is policy, not politics, that influences the economy and markets over time.
Markets picked up steam recently, anticipating that the Federal Reserve (Fed) could follow a 75 bps rate hike in November with a smaller 50 bps rate increase in December. Markets have been rallying since mid-October, up 7% since the mid-month low. But is this just another bear market rally?
As usual, China has been going through its own economic, policy, and political cycle. While the rest of the global economy is slowing down and facing the possibility of recession ahead due to elevated inflation and rapid policy tightening, China’s economy began to slow down over a year ago and already went through a contraction in the second quarter.
2022 has been a volatile year, and this volatility has been almost entirely driven by fluctuations in valuations; until recently, earnings estimates had been climbing or stable.
The hallmark of core bonds is their diversification benefits and lower volatility to risk assets, which make them an important ballast in portfolios. However, with bonds down double digits this year , investors are struggling with their fixed income allocations.
The third quarter earnings season is set to kick-off with the large U.S. banks releasing results. Our current estimate for 3Q22 S&P 500 operating earnings per share (EPS) is $53.82, representing year-over-year (y/y) growth of 3.5% and quarter-over-quarter (q/q) growth of 14.8%.
In the aftermath of the COVID pandemic, global economies are reeling in the face of decades-high inflation, brought about first by unprecedented levels of fiscal stimulus and more recently by supply-chain snarls, which in turn are largely attributable to China’s continued COVID-zero policy and the ongoing war in Ukraine.
For investors, while it may seem reasonable to assume a fall in job openings would precede an uptick in the unemployment rate, the still huge gap between labor demand and supply suggests that job openings can come down further without meaningfully pushing up the unemployment rate.
In recent weeks, a series of fiscal and monetary developments led volatility to spike in the United Kingdom’s government bond and currency markets. By our lights, the combination of these events amplified uncertainty about the UK’s institutional architecture and the Bank of England’s commitment to sustainable monetary and fiscal policy.
During the September Federal Open Market Committee (FOMC) press conference, Chair Powell noted that the Committee would like to see positive real rates across the entire yield curve as one indication that they have reached an appropriate policy stance.
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.
A re-rating of valuations has led to negative equity returns year-to-date, but importantly, earnings estimates have continued to trend higher. In an environment of rising rates, earnings will be the key 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”.
Investors have had to process a torrent of information and wild swings in sentiment so far this year.
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.
Global governments have been swift and bold in supporting their economies, building a bridge to get consumers, small businesses and corporates over the present abyss to the other side. Given the unknown breadth and depth of the abyss, more stimulus may be required.
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.
Ultimately, the Fed’s next step will be dictated by the pathway of the virus, says Dryden.
The next president will necessarily have a different policy agenda now given the events that have unfolded than he would have at the beginning of the year.
Infrastructure resiliency during the COVID-19 crisis
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.
While many changes are likely to emerge, one clear trend, with far-reaching macro and market implications, is the increase in leverage, says Azzarello.
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.
Sentiment, and valuations, are likely to keep markets relatively contained until there is clarity about the extent and length of the outbreak, says Tyler Voigt.
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.
"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
Global Market Strategist
Global Market Strategist
Chief Global Strategist
Global Market Strategist
Global Market Strategist
Global Market Strategist
Global Market Strategist
Global Market Strategist
