Markets in a Minute

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

December 10, 2018

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  • Equitites: Risk aversion fuels a growth rotation

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Risk aversion rebound in December

    The equity market selloff deepened, fueled by rising skepticism about the 90-day trade war truce between the U.S. and China. If the agreement between the world’s two largest economies unravels, Europe, Asia, and other economically weaker regions could suffer. Reduced demand for commodities has been another worrisome indicator of decelerating growth, especially when added to the U.S. yield curve flattening. Industrials, Technology, and Financials have been suffering the most this month.

    Potential pause by the Fed

    Fed Chair Jerome Powell recently hinted that the Fed may soon press pause on its current rate-hike campaign to assess the effects of having raised interest rates by 2.0% since December 2015. Investors seem to be taking this as a sign that the Fed is starting to worry about potentially overtightening rates in this cycle and cooling the U.S. economy too quickly, stalling growth.

    Searching for solid balance sheets

    A rotation toward defensive growth stocks has begun, with investors starting to favor stocks of companies with strong balance sheets and quality earnings that may generate robust earnings growth. Meanwhile, department store sales have been pointing to the potential for one of the best holiday shopping seasons in years. Historically speaking, Thanksgiving shopping has often set the tone for how the holiday season will shape up.

  • Fixed Income: Clouded path for rates in 2019

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Glimmer of a yield curve inversion

    Investors recently witnessed the first signs of an inverting Treasury yield curve when 5-year Treasury yields dropped below the yield on the 2-year Treasury. While the more commonly observed “10s minus 2s” curve is still slightly positive, the inversion in the shorter end of the curve has reignited questions about the economic cycle and the possibility of recession.

    Hints of a December rate hike

    As we approach the end of the third year of the current rate-hike cycle, the Fed has hinted that U.S. economic strength, especially in labor markets, likely warrants another hike in December. Members of the Fed have acknowledged the flattening yield curve and various other late-cycle indicators. However, the Fed’s dual mandate of full employment and price stability still governs their decisions. The markets are pricing in a likely December rate hike, but the direction for rates by late 2019 has become quite clouded.

    Fed comments trump the yield curve

    We think investors would be well served to stay tuned to the Fed. We believe that it’s important to be aware of the economic risks and not blindly follow single indicators like the yield curve. As short-term interest rates rise to a “neutral” level for the economy, subsequent hikes should become more data-driven. The yield on high-quality fixed income is attractive given the stability of inflation. This should be broadly supportive to fixed income.