Markets in a Minute

Insights on the latest global investment news from our Chief Investment Officers, Omar Aguilar and Brett Wander.

April 15, 2019

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  • Equities:
    Off to the races in Q1

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    An amazing Q1 for U.S. equities

    The S&P 500® Index returned 13% in the first quarter, driven by signs that major central banks intend to keep interest rates accommodative amid the economic soft patch. In the U.S., although the recent yield curve inversion may seem worrisome, we expect the Fed to remain patient, flexible, and data-driven, and we don’t expect a recession anytime soon.

    The U.S. waxed, while Europe waned

    A 3.8% unemployment rate in March confirmed that the U.S. labor market remains solid, while modest wage growth suggested that the economy isn’t overheating. In addition, consumer sentiment has bounced back in recent months after a weak January, as investors feel increasingly confident about a potential trade deal between the U.S. and China.

    Internationally, weak German manufacturing activity hinted at a deeper-than-expected slowdown in the euro zone, while Brexit uncertainty has been wreaking havoc with the pound sterling. Meanwhile, China is employing a variety of tools to stabilize its economy and stimulate growth, with fiscal stimulus looking particularly helpful for emerging markets.

    An emphasis on higher-quality assets

    We think it might be prudent to reduce pure growth stock and Financials exposure, and reallocate into high-quality stocks in Industrials, Energy, and Consumer Discretionary.

  • Fixed Income:
    The market leads, the Fed follows suit

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Last December, a long, long time ago

    Back in December, interest rate futures began pricing in the possibility of a rate cut for 2019, in spite of the Fed’s forecast that two additional hikes would be necessary this year. Within only a month or two, the Fed had arrived at the realization that the market had it right all along. We find it interesting that Fed Chair Jerome Powell never expressly mentioned the possibility of rate cuts, although he did go so far as to say that the Fed would likely be on hold for quite some time.

    The difference a few months can make

    Today, the market is pricing in a relatively high likelihood that the next Fed move will be a rate cut. However, at the most recent interest rate policy meeting, the Fed only went so far as to acknowledge that no further rate hikes seem warranted in 2019. This follows several months of Chair Powell preaching the benefits of patience with regard to the future path of monetary policy. In other words, the Fed has been moving toward the market’s view . . . very slowly.

    Where do we go from here

    The markets are currently pricing in a full rate cut by the end of 2019. In fact, 2-year Treasury yields are trading below the federal funds rate, representing a yield curve inversion among short-term rates. What can investors learn from the recent decline in Fed rate-hike forecasts? Not much! We think it’s better to follow the markets than the Fed right now.