The 115th World Series began this week, the culmination of a 162-game regular season. While this season is long relative to other sports, the Investment Strategy season never ends. We are constantly evaluating economic and market data and ensuring that our forecasts, strategies, and outlooks are prepared for ‘primetime.’
The National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
As we saw in the Summary of Economic Projections released in September, the Fed’s economic outlook is similar to most outside economists. The baseline scenario is for moderate growth in 2020, with growth in real GDP near 2%, and inflation moving gradually toward the Fed’s 2% goal.
The Treasury Department is expected to report that the federal budget deficit for FY19 (which ended in September) fell short of $1 trillion. That’s a lot of money, especially with an economy running full tilt. However, the government currently doesn’t have any problem borrowing.
Read the latest Weekly Headings by CIO Larry Adam.
Chief Economist Scott Brown discusses current economic conditions.
The ISM Manufacturing Index fell further into contraction in September, while the Non-Manufacturing Index slowed (consistent with a continued expansion in the overall economy, but at a slower pace). The Employment Report was a mixed bag. Nonfarm payrolls rose by 136,000 in the initial estimate for September, with a net upward revision of +45,000 to July and August.
On the 80th anniversary of the iconic movie’s release, CIO Larry Adam draws parallels between the film’s themes and today’s financial markets.
Currently, a simple yield curve model puts the odds of entering a recession within the next 12 months at about 40%.
Though many market-influencing variables remain in play, the S&P 500 neared all-time high levels in September.
The economic data reports were mixed and had a limited impact on the financial markets. Investors were generally optimistic about potential progress in trade talks and mostly ignored the turmoil in Washington.
As expected, the Fed lowered short-term interest rates and officials remained divided about what to do next. The policy meeting came in a week that saw elevated funding pressures in money markets, which drove the effective federal funds rate above the top of the target range.
The Federal Open Market Committee will meet this week to set monetary policy. It’s widely expected that the FOMC will lower the federal funds target range by another 25 basis points, although that’s not a done deal.
Nonfarm payrolls rose by 130,000 in the initial estimate for August, less than expected and despite a 25,000 boost from census hiring. For production workers, average hourly earnings advanced by 0.5% (+3.5% y/y). Monthly wage and payroll figures can be choppy, but the underlying trend in job growth is lower.
The ISM surveys for August were mixed and the employment report disappointed, but investors were encouraged by prospects for U.S./China trade talks, which are set to resume at a high level in early October.
Market volatility remains elevated, reflecting trade tensions and continued concern around the yield curve.
Recent economic data reports have continued to paint a mixed picture of the U.S. economy, with strength in consumer spending and a mild recession in manufacturing. On top of this, investors remain concerned about several issues, including global growth, geopolitical uncertainties, trade policy, and an inverted yield curve.
The minutes of the July 30-31 Federal Open Market Committee (when the Fed lowered short-term interest rates by 25 basis points) showed that officials were split. “A couple” preferred a 50 basis point cut, while “several” favored no change.
In his speech at the Kansas City Fed’s annual monetary policy symposium in Jackson Hole, Fed Chair Powell discussed the challenge of keeping the U.S. economy “in a favorable space” in the face of significant risks.
The spread between the 10-year Treasury note yield and the 2-year yield briefly dipped below 0. An inverted yield curve signals a strong likelihood of entering a recession within the next 12 months, but the odds of a recession had already been rising as the yield curve has flattened.
A 2-year/10-year Treasury inversion has left markets shaken – but don't let short-term volatility get the better of your long-term financial focus.
On August 5, China allowed its currency, the yuan, to depreciate against the U.S. dollar. It wasn’t a particularly large move, a little more than 1.5%, but it breached 7 yuan per $ -- a level seen as “psychologically important.”
Readers should be aware that tariffs are a misguided way to deal with bilateral trade deficits and misbehavior on the part of certain trading partners. Tariffs are a tax on U.S. consumers and businesses. Tariffs raise costs, invite retaliation, disrupt supply chains, and dampen business fixed investment.
Real (inflation-adjusted) GDP growth rose at a 2.1% annual rate in the advance estimate for 2Q19, a bit better than the median forecast (+1.8%), but growth was concentrated in just two components, consumer spending and government. Everything else was down.
With the future of technology remaining bright and necessary for the U.S. to remain the dominant global superpower, we continue to view technology as one of our favorite equity sectors.
Retail sales results for June were stronger than expected, consistent with a pickup in consumer spending growth in 2Q19 (although that follows a weak 1Q19). Industrial production was flat, but manufacturing output picked up a bit in June (still in an overall downtrend in 2019).
We often talk about how difficult predicting can be, even for the financial industry experts. Today’s markets have many influencing variables from the traditional economic releases and transforming population dynamics to the more recent global influences. Perhaps one of the greatest modern day market influences are the world’s central banks.
Nonfarm payrolls rose more than expected in the initial estimate for June. The news sent equity futures lower, bond yields higher, and reduced the odds of more aggressive Fed policy action later this month.
All right, one more time. Tariffs raise costs for U.S. consumers and business, disrupt supply chains, invite retaliation, and undermine business fixed investment.
Like Batman, investors cannot resort to superhuman powers when investing. Instead, knowledge, analytical skills and ingenuity are paramount for success. Asset allocation, diversification and risk management are essential dynamics to consider as volatility moves higher.
Senior Fed officials were divided on whether it will be appropriate to lower short-term interest rates by the end of the year, although even those expecting no change felt that the case for easier policy had strengthened.
While the federal funds futures market is pricing in some chance (about 24%) of a rate cut this week, the Federal Open Market Committee is widely expected to leave rates steady.
The sharp increase in geopolitical risk, potential action by OPEC to boost crude oil prices (through further supply cuts), and our view that concerns surrounding global growth are overdone support our year-end WTI forecast of $70/bbl.
The May job market report disappointed, but it was hardly a disaster. Nonfarm payrolls were reported to have risen by 75,000 in the initial estimate, following a 224,000 gain in April.
The “inconvenient truth” of equity market pullbacks is that investors tend to want them in order to invest at more favorable prices, but when they actually occur, investors get nervous, question their conviction and postpone their purchases.
After my father, a Pearl Harbor survivor, died in 2011, we found a shoebox. It contained items that belonged to my Uncle Bill (my mother’s brother), who had also served in WWII. There was Bill’s birth certificate and baptism record, an address book, and some pages that looked like they were torn out of a diary.
The partial government shutdown, poor weather, and the late Easter appeared to dampen the underlying pace of growth in the first quarter. However, April data on retail sales, industrial production, and durable goods orders suggest the softness will be longer lasting.
Memorial Day is also the “unofficial” start to summer as the temperature heats up, school ends, and vacation season begins. With more people on vacation there is a tendency for investors to lose focus on the financial markets. However, this particular summer presents numerous events, deadlines, and potential headlines that we believe investors cannot ignore as they could lead to increased volatility, both to the upside and downside.
Tariffs have had a negative impact on the U.S. economy, but a relatively limited one to date. Pain is obviously felt more in some areas than others, but the cumulative impact is growing and a continued escalation in trade tensions would further dampen growth.
As the Friday early morning deadline (12:01 AM EST) expired, tariffs on an additional $200 billion of Chinese imports have technically gone into effect. However, as we go to press, negotiations are ongoing with the hope that a compromise can be brokered.
Equities remain near all-time highs, as the S&P 500 closed at a record high two times this week and is now up 17.1% year-to-date, the best start to a year on a price return basis since 1987.