Markets in a Minute

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

March 15, 2019

Download PDF
  • Equities:
    An incredible start to 2019

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    2019 gains after 2018 pains

    After its worst December since 1931, the S&P 500® Index returned more than 11% for the first two months of 2019, its best early year performance in nearly 30 years. Fewer worries about a potential U.S.-China trade war, the growth-inhibiting effects of the government shutdown, and the slowing effects of higher interest rates helped. Managing these obstacles allowed the current bull market to recently reach its 10th birthday, with stocks up by more than 300% since early 2009.

    Ongoing global growth and earnings deceleration

    Global central banks are reverting back to a more accommodative stance regarding monetary policies amid sluggish global growth. In the U.S., the Fed has made it clear that further rate hikes are on hold for now, a decision firmly supported by the disappointing February employment report that confirmed softening U.S. growth. In Europe, the European Central Bank stated that interest rates are likely to remain at current levels for the remainder of 2019 amid lethargic manufacturing activity and a slowdown in China.

    Reassess your clients’ risk tolerances

    Recent agreements between the U.S. and China have benefited stocks, although volatility could ignite as details surface. Given this backdrop, advisors may want to consider revisiting client risk tolerances, emphasizing high-quality dividend-growing companies, and looking for select stocks among Consumer Discretionary, Industrials, and Technology.

  • Fixed Income:
    Stop watching the Fed’s balance sheet

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Much like watching paint dry

    In late 2017, the Fed started reducing the size of its balance sheet, which had ballooned to about $4.5 trillion in the wake of the financial crisis. Then Fed Chair Janet Yellen attempted to assuage investors’ fears that Treasury yields would rise in response by referring to the planned pace of the unwinding process as akin to, “watching paint dry.” Although this process has recently reemerged as a point of concern, investors would be wise to remember Yellen’s words.

    Merely billions amid trillions

    Today, the Fed’s balance sheet is about $500 billion less than in 2017. However, Treasury and mortgage-backed securities have hardly noticed the unwinding, with yields well within recent ranges. After all, the size of the U.S. government bond market is more than $20 trillion, so the Fed’s reductions haven’t been particularly impactful. We expect similar effects going forward, with the Fed’s transparent and measured approach likely preventing any major shocks to interest rates.

    Focus on inflation, not the balance sheet

    Rather than the balance sheet, inflation expectations are where the real action is at. And as long as inflation is muted, don’t expect a significant rise in rates. The Fed has made it clear that adjusting short-term interest rates, not the balance sheet, will be its primary tool for implementing monetary policy. In other words, the Fed is telling investors not to worry about the balance sheet—and we think that’s good advice.