Markets in a Minute

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

August 15, 2019

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  • Equities:
    Scorched by the flames of conflict

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Trade war tensions fueled market volatility

    Unexpected U.S.-imposed tariffs on $300 billion in Chinese goods—and concerns about pass-through costs to consumers—recently roiled the financial markets, with China's currency crossing over the key psychological threshold of 7 yuan to the dollar. Bond yields fell in response, and stocks sank, as worries that the contagion may spread beyond China reverberated around the world. Agriculture, semiconductor, and technology stocks exposed to China took the biggest hit, as investors selectively rotated into higher-quality stocks after months of outperformance by momentum sectors.

    Portrait of a healthy U.S. economy

    Looking beyond the volatile market backdrop, recent data portrayed a resilient U.S. economy and healthy labor market. Consistent with where we are in the U.S. economic cycle, employment growth is cooling, the labor force participation rate is rising, and wage growth is modest. Nevertheless, with global growth slowing, the Fed cut interest rates in July in an effort to ensure that U.S. financial prospects remain intact.

    Revisit your clients' long-term investment strategies

    Now seems like an excellent opportunity to rebalance your clients toward their long-term allocations. We believe that energy, financials, and health care may face hurdles in the current environment, while higher-quality growth companies in cyclical sectors might benefit from any further rate cuts.

  • Fixed Income:
    When the market talks, you gotta listen

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Look for significant Fed rate cuts

    On the heels of last month's Fed rate cut, the fixed income market is pricing in a good chance for three more cuts this year. A September cut seems certain, and might even be 50 basis points (0.50%). We could debate whether the Fed should cut rates, but what seems very likely is this: if the market expects a cut, the Fed will deliver. This has been the pattern over the past 10 years, and the Fed seems unlikely to change up its game plan anytime soon.

    U.S. bond yields could fall further

    Over recent weeks, yields on government bonds collapsed globally, and in some cases, fell to all-time lows. German "bund" yields are meaningfully negative (even 30-year bunds!), while yields on U.S. Treasuries are at their lowest levels in years. If you think that U.S. rates can't fall further, just take a look at rates overseas. International bond yields have fallen to unfathomably low levels, and there is always the possibility that U.S. yields might follow suit.

    A healthy jobs market, but no inflation

    The U.S. jobs market remains robust, with the unemployment rate near 50-year lows. Clearly, we have job growth without inflation. Furthermore, equities are near all-time highs, and credit spreads remain relatively tight. While yield declines usually indicate a weak economy, there's a different story playing out now: continued growth, with virtually no inflation.