Markets in a Minute

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

July 15, 2019

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  • Equities:
    Not your typical market rally

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    A terrific performance by equities this year

    This year’s terrific performance by equities hasn’t been fueled by a typical risk-on backdrop. Instead, high-beta sectors, small-cap stocks, and emerging markets have generally underperformed comparatively conservative large-cap stocks, developed markets, and low-beta counterparts. With global bond yields and sentiment downshifting, defensive sectors offering appealing dividend yields like utilities and consumer staples have generally paced the market’s advance. We believe that these trends could continue for now.

    Solid equity market returns in June

    After a difficult May, equities rebounded in June amid rising investor confidence for accommodative interest rates globally. The rally was also helped by optimism ahead of trade talks between the U.S. and China at the late June G20 meeting. Meanwhile, market volatility rose amid Middle East tensions.

    When bad news is good news

    U.S. GDP seemed to slow in the second quarter. Although a problem on the surface, in the current environment—where tight labor markets, healthy consumer spending, and a slight rise in inflation are economically supportive—softer growth may set the stage for a Fed rate cut as soon as this month. With the U.S. economy otherwise stable, a rate cut might be viewed more as “insurance” that the economy will revive than as an implication that a “recession” is rapidly approaching.

  • Fixed Income:
    Fed rate cut on 7/31, here’s why . . .

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    The market is the tail that wags the dog

    Since the financial crisis 10 years ago, the Fed’s interest rate policy setting committee has met 80 times. In each of these meetings, the Fed has done exactly what the market expected. With just over two weeks to go until the next meeting, the market clearly expects the Fed to cut rates. Our translation: that’s exactly what they’ll do. In fact, if the Fed were to leave rates unchanged, the markets would likely go crazy, and the Fed’s credibility would certainly be affected.

    When the Fed says nothing, it says everything

    The Fed is well aware that the market expects a rate cut at the next meeting, and it’s looking likely to be a 25 basis point (0.25%) cut—not the 50 basis points that seemed possible a few weeks ago. The Fed has had lots of chances to convince the market otherwise, and they’ve been virtually silent. Our translation: “Mr. Market, you’re right on the money—again!”

    Would a rate cut quiet President Trump’s criticism

    It’s no secret that President Trump wants a rate cut . . . and he wants it yesterday. We can all speculate about whether Trump’s pressure on Fed Chair Jerome Powell is having an impact, or if the Fed is maintaining objectivity. Regardless, cutting rates at the end of July might not actually reduce the pressure. Remember that the mid-September meeting is just around the corner. Do you think Trump would take a wait-and-see approach even if the Fed cuts rates, or would the tweets continue, imploring Powell to keep the cuts coming?