Markets in a Minute

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

February 15, 2019

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  • Equities:
    Investor sentiment becomes more defensive

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Strongest January in U.S. equity markets since the 1980s

    U.S. equities and bonds rallied in tandem, with the S&P 500 Index returning 7.9% in January. Renewed optimism about ongoing trade negotiations between the U.S. and China, a temporary solution to the government shutdown, positive corporate earnings, and encouraging comments from the Fed fueled the rally, led by financials and small-cap equities. With nearly half of S&P 500 companies reporting, more than 65% have exceeded earnings expectations.

    Global slowdown, geopolitical tension increase volatility

    Despite solid U.S. economic data, the Fed put a hold on tightening monetary policy, amid concerns about global economic deceleration and tepid inflation numbers. Faltering home sales, a slight decline in manufacturing activity, and slowing demand for mortgages and consumer loans provided further support for the Fed’s view that U.S. GDP growth will continue to slow. Based on market trends, concerns about Brexit, Italy’s fiscal condition, and weaker economic data out of the EU and China seem to continue to weigh on global equity markets.

    Investor sentiment has become more defensive

    U.S. equity funds posted net outflows of more than $15 billion in January even as the markets rallied. Based on market activity, investors are reallocating to cash and fixed-income assets, indicating they are taking a more defensive and cautious approach.

  • Fixed Income:
    Is a rate cut on the horizon?

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    A Jerome Powell about face!

    The Fed has been on a one-way tightening path since 2015, hiking rates nine times—most recently at their year-end meeting. However, growth fears triggered volatility in equity markets in December. Interest rates fell in response, as investors flocked to government securities like Treasuries. With a backdrop of falling inflation and slowing global growth, it’s not clear how the Fed will approach monetary policy as the year progresses.

    Wait and see

    The new message from the Fed seeks to convince investors that it is seriously considering the impact of new economic realities. Chairman Powell acknowledged that market volatility and cloudy economic prospects gave them pause on their rate-hiking path. This message was reaffirmed at the January meeting when the Committee removed the three-year-long bias toward increasing rates and replaced it with a commitment to "wait and see."

    Is a rate cut on the horizon?

    Tailwinds from a tight labor market and plentiful fiscal stimulus, combined with headwinds from slowing housing and manufacturing sectors, have made the Fed’s job increasingly complicated. While another rate hike might occur this year, markets are skeptical. In fact, a rate cut now appears possible by year-end and even more likely by next year. Investors would be wise to prepare for a wide range of outcomes.