Markets in a Minute

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

May 15, 2019

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  • Equities:
    Early month rally hits trade bumps

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    Equities rally on accommodative interest rate policies

    The 2019 rally has primarily been driven by accommodative major central bank policies, along with better-than-expected Q1 earnings. The odds for a rate cut by the Fed in 2019 have been rising, while the European Central Bank has continued to expand its balance sheet in an effort to stabilize growth. More than 75% of S&P 500® firms reporting earnings have posted better-than-expected results, although only about 50% have exceeded sales estimates. Buybacks, rather than capital-expenditure reductions, have been a focus for firms.

    Global slowdown and inflation headwinds

    In spite of a solid labor market and stable U.S. economy, inflation has been below the Fed’s target for over a decade. Benign wage growth, demographics, trade disputes, reduced demand for goods, and corporate unwillingness to pass along higher labor costs to consumers are headwinds for domestic inflation. Overseas, inflation also remains low. Meanwhile, China is employing a variety of tools to stimulate growth, with its fiscal policies a potential positive for emerging markets.

    Bumpy trade talks spark volatility

    The early May rally in global equities is being tempered by fresh uncertainty regarding trade talks between the U.S. and China. Overall investor sentiment has been generally upbeat in 2019, but stocks seem particularly sensitive to the ongoing trade negotiations and potential economic implications.

  • Fixed Income:
    President Trump wants a rate cut

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    What’s been happening, and why

    Donald Trump has been tweeting intensely about the benefits of an interest rate cut, which he’s been trying to push Fed Chair Jerome Powell toward for several months. It’s not unheard of for a president to try and pressure the Fed to keep rates low. The hope is that this would spur economic growth and provide political benefits. What is new is the social media venue. Will this approach prompt a rate cut? And if so, who would win, and who would lose?

    Rate cut winners, and why

    The stock market typically sells off in response to a rate cut, which implies that the economy is on the decline. However, presidential pressure and low inflation could prompt a preemptive cut now. This could be a positive for equities and fixed income as the additional stimulus might further extend the longest economic expansion in U.S. history. And let’s not forget about homeowners, who might be able to refinance to lower rate mortgages and improve their financial positions.

    Rate cut losers, and why

    Savers are first in line to take a hit when the Fed cuts rates. After finally reaching a yield level close to the rate of inflation on their T-bills, CDs, and money market accounts, savers could become quite frustrated if their yields decline in response to a rate cut. We feel that investors should therefore be aware of their portfolio exposures and be willing to adjust them as the economic outlook shifts.