Markets in a Minute

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

June 15, 2019

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  • Equities:
    Fed "put" fueled an early June rebound

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Rate cut expectations fueled a rebound

    Equity markets rebounded in early June after a challenging May. In the U.S., interest rate futures recently forecasted a greater than 90% chance that the Fed will cut rates before September, creating a “put” on short-term equity market returns amid optimism that central banks will remain accommodating. Overseas, the European Central Bank signaled that rates will remain low until at least 2020, while China’s central bank announced stimulative policies to combat trade war effects.

    Slower U.S. growth, but no imminent recession

    A modest 75,000 jobs added in May, a downshift in new home sales, lackluster inflation, trade war uncertainties, and disappointing retail sales seem likely to limit second-quarter U.S. growth. Nevertheless, the U.S. economy is well supported by tight labor markets, a 50-year low in the unemployment rate, and stable consumer confidence.

    Sentiment negatively affected by trade rhetoric

    Capital expenditures have slowed in 2019, reflecting the negative effects of trade war concerns on business confidence. We believe that quality dividend-paying stocks and select opportunities in Technology, Real Estate, Consumer Discretionary, and Health Care make sense in the current environment, as investors have been migrating toward higher-quality assets amid the ongoing trade-related challenges and falling long-term bond yields.

  • Fixed Income:
    Focused on the yield curve

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    The yield curve inversion is here—finally

    The highly anticipated yield curve inversion has finally arrived. A rapid decline in longer-term yields in May, combined with relatively stable shorter-term yields, has recently caused 3-month T-bills to yield 0.2% more than 10-year Treasuries. Usually, the yield curve relationship is the opposite. In fact, the yield curve has inverted by about this much or more only two other times in the past 20 years, most recently in 2006.

    Why is the yield curve inverted

    The Fed’s nine rate hikes since late 2015 have pushed up short-term rates to 12-year highs. Meanwhile, inflation remains stubbornly below the Fed’s 2.0% target in spite of the lowest unemployment rate in 50 years, keeping a lid on longer-term rates. Hovering in the background, trade war concerns are driving up worries about U.S. economic prospects, which have been under close scrutiny lately.

    Maximize yield at your own risk

    Investors can be tempted to shorten the duration—a key gauge of interest rate sensitivity—of their fixed income portfolios when the yield curve inverts. “Why own a 10-year Treasury when a short-term T-bill yields more?” However, it’s important to appreciate that an inverted curve implies that rates are expected to fall. When rates fall across the curve, long-term bonds typically generate much higher total returns than short-term bonds, due to their longer times to maturity.