Markets in a Minute

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

May 14, 2018

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  • Equities: An impressive earnings season

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Q1 earnings—solid across the board

    More than 75% of companies have reported better-than-expected first-quarter results, including solid year-over-year growth in earnings per share. Fiscal stimulus has driven up capital expenditures and buybacks of outstanding shares of stock across many industries. Technology and Health Care have continued to lead other sectors amid growth in sales and capital expenditures, while Energy and Materials enjoyed strong revenue growth during this year’s first three months. Overseas, European companies have also shown a rise in profit margins fueled by increased productivity growth.

    The wall of worry

    Solid fundamentals and strong economic growth have not translated into a sustainable stock market rally. Instead, equity investors seem concerned about rising rates and developments surrounding Iran, U.S.-China tariffs, and NAFTA negotiations. For the first time since 2014, oil is now back above $70 per barrel, which is translating into rising inflation expectations. This backdrop is helping to keep 10-year Treasury yields around 3.0%.

    Strong U.S. dollar creates EM uncertainty

    Despite positive growth rates, volatility among emerging markets may continue to rise, driven by the strengthening U.S. dollar and increased political uncertainty. International developed and small-cap companies seem well positioned for the current environment.

  • Fixed Income: Fed speaks, bond market sleeps

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    No change to overnight rates

    The Fed recently met for the third time this year, with chair Jerome Powell announcing a widely anticipated, “No change to rate policy.” In the Fed's post-meeting statement, they reiterated that they are comfortable with inflation at around 2% and won’t lose sleep if it’s a little below or a little above this target. They also emphasized that they aren’t overly concerned with the likelihood that inflation will run away to the upside.

    The bond market shrugged

    Treasuries shrugged off the news and continued trading in a relatively tight range. Yields on both 2- and 10-year Treasuries have been in a 0.5% range over the past 3 or 4 months. The yield curve has been gradually flattening, and the market continues to price in at least two more rates hikes this year.

    The Fed’s daily “report card”

    Every day the market provides the Fed with a report card. When the Fed was viewed as not raising rates fast enough and inflation was likely to take hold, 10-year yields rose as investors required higher yields in compensation. Conversely, when the Fed seemed to be hiking rates too aggressively, long-term yields generally fell, reflecting the risk of a Fed-induced recession. So far, Jerome Powell has received passing grades from the market, as long-term rates continue to trade in a relatively narrow range, and yield volatility remains benign.