In the last two months, I have had the pleasure of meeting with clients in a variety of different countries in Europe and Asia, as well as the U.S. There is one issue that all of these clients are interested in: the U.S.-China trade conflict.
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Last week’s Federal Reserve (Fed) meeting proceeded largely as expected, but a very important development for stocks occurred during the follow-up press conference.
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Last week was a “risk on” week for the markets, with stocks rising. The MSCI All Country World Index rose during the course of the week, the S&P 500 Index came close to its all-time high, and the tech-heavy Nasdaq Composite Index surged a robust 1.9%.1 U.S. Treasury yields also rose as fear dissipated – the 10-year Treasury yield rose to 1.8% and the 30-year finished at 2.29%.1 By the end of last week, there was a relatively comfortable 18-point spread between the 2-year and the 10-year Treasury yield.1
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Many people around the world observe Halloween in the month of October, celebrating all that is spooky and macabre. My kids have all been enthralled with Halloween, choosing their costumes several months in advance (one year, my older son insisted on wearing his costume every single day of the month of October). And plenty of adults who have outgrown trick-or-treat still believe that October would not be complete without horror movies running non-stop throughout the month. But no matter if you celebrate with cute kids’ costumes or elaborate haunted houses – what makes Halloween fun is the knowledge that the scares aren’t real.
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One of the key themes I have been discussing in the last several years is geopolitical disruption – and we got a heavy dose of it last week. However, one of my main points over the past few years is that investors should try to identify the geopolitical disruption that really matters for the economy and markets, and ignore the events that are just background noise (most fall into this category, in my view). In particular, issues that can increase economic policy uncertainty are what we need to be sensitive to, as they can have significant consequences for economies and markets. Below, I assess today’s three major headlines and where they fall on the spectrum of “news versus noise” in relation to their potential longer-term impact on the markets.
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I am the mother of three, including a 13-year-old girl and a 12-year-old boy. Like many American children their age, they spent the last several months obsessed with an urban myth surrounding Area 51. Many conspiracy theorists believe that Area 51, a secretive Air Force base in Nevada, is being used by the U.S. military to house aliens. One creative guy thought it would be funny to start an online movement to storm Area 51 this past weekend. What began as a joke gathered steam quickly, and 2 million people signed up to force entry into Area 51. That huge response created great excitement and anticipation about what the event would bring.
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Last week, the European Central Bank (ECB) decided to take a significant step away from normalization and toward more accommodation. It cut the deposit facility rate by 0.1% to a level of -0.5% (the first time the deposit rate has changed since 2016) and announced a re-ignition of quantitative easing (QE).1
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August is supposed to be a slow, relaxing month – but this August was anything but that for investors. Trade frictions were on the rise for much of the month. The U.S. Treasury yield curve inverted several times, causing jitters for investors concerned that a U.S. recession is imminent. Of course, stock volatility rose, with the CBOE Volatility Index (VIX) hitting its highest level of 2019 in the month of August.1 Instead of enjoying calm, sunny days, markets were rocked last month by interviews with Federal Open Market Committee (FOMC) members at Jackson Hole, tweets from President Donald Trump, and geopolitical events in the U.K., Italy and India – to name just a few.
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Last week was one of those weeks when anyone following the news flow closely would have a serious case of whiplash. Friday alone put me in a neck brace as we saw a serious escalation in the trade wars between the U.S. and China. Other notable events last week included:
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Last week, the U.S. Treasury yield curve, specifically the spread between the 10-year U.S. Treasury rate and the 2-year U.S. Treasury rate, briefly inverted. An inverted yield curve is considered to be a good predictor of recession, and so markets sold off on fears that a recession will occur in the next year. However, I believe a U.S. recession is not a foregone conclusion — and so we should monitor the economic data closely. I have received a number of questions from clients and the media about what other indicators to follow to help divine how the economy is doing. The following are just a few indicators to watch — and some caveats:
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The U.S. Treasury yield curve, specifically the spread between the 10-year U.S. Treasury rate and the 2-year U.S. Treasury rate, briefly inverted on the morning of Aug. 14. As of early afternoon, the spread was roughly 1 to 2 basis points wide. The brief inversion follows the inversions earlier this year between the spread of short-term rates (such as the federal funds rate and the 3-month Treasury bill) and the benchmark 10-year rate.
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As the Federal Reserve joins the European Central Bank (ECB) and Bank of Japan in rolling out new stimulus measures, global central banks are making their marks on the investment outlook for the remainder of 2019.
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One of my all-time favorite movies is “Jaws,” an iconic American summer movie about a great white shark that terrorizes a seaside New England resort town. Maybe it’s because I like the musical score, or maybe it’s because I like hearing my last name interspersed throughout the movie (a particularly noteworthy line is “Hooper drives the boat, Chief”), but I can be found watching the movie at least several times each summer. In fact, I like the movie so much that I’ve watched documentaries and read articles about the making of “Jaws.” My husband thought that was a strange and ridiculous waste of time, but I actually learned some very interesting factoids.
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Monday’s significant market sell-off reflected fears about escalating trade tensions, which caused investors to panic. This sell-off should not come as a surprise to those who recognized that stocks were vulnerable because the market wasn’t fully pricing in trade tensions. I view this as a healthy re-pricing of stocks to more fully factor in the potential that the trade war is likely to drag on.
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Back when I was in high school, I worked as a lifeguard. I thought it would be a great job, with an opportunity to get a tan and do some summer reading. However, it was a lot of responsibility for a 15-year-old, and I found myself running around with a first aid kit, bandaging cut toes and knees, and even having to perform a water rescue in my first few weeks on the job. I soon realized that I could save myself a lot of trouble, especially since I hated the sight of blood, if I strictly enforced the rules – like no running in the pool area – in order to pre-empt accidents and other mishaps.
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As any parent of toddlers or teenagers knows, there’s often a big difference between what kids want (candy and a later bedtime) and what they need (vegetables and plenty of rest). I’m reminded of this as I anticipate this month’s Federal Reserve (Fed) meeting. A cut is widely expected — but what is the level that markets need, versus what they want?
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I spent the past week in Knoxville, Tennessee, watching my daughter’s basketball team play in a national tournament. I am the unofficial scorekeeper of the team, which makes the experience even more interesting, as I track the games on a variety of metrics. What I found is that the risks to my daughter’s team were different in each game, depending on the abilities of the opposing team. It reminded me that various market environments present different risks and, just as quickly as one game ends and a new game against a different team begins, so too can environments change.
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The Federal Reserve (Fed) met last week and clearly telegraphed that it will no longer be “patient” and that it is leaning toward loosening monetary policy. Why? Fed Chair Jay Powell said trade developments and global growth concerns are on the mind of the central bank. As I look into the second half of the year, those two items are key to my outlook as well – and I believe the willingness of central banks to become more accommodative could be a positive development for stocks.
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All eyes will be on this week’s U.S. Federal Reserve (Fed) meeting — especially the statement (whether the central bank will retain its “patient” stance) and the “dot plot” (which charts the outlook for interest rates). The June 18-19 Fed meeting is very important because market expectations have gotten so dovish recently. And with risks rising, many investors recognize that once again the Fed stands between them and a more challenging stock market environment.
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A collective sigh of relief was expelled on Friday evening as U.S. President Donald Trump announced he would indefinitely suspend the planned imposition of tariffs on Mexico – which was set to go into effect on June 10. Markets have entered “risk on” mode, given that the crisis was averted. However, we need to recognize that the announcement that the U.S. would apply a tariff on Mexican goods as a way to address immigration was a “game changer.” I believe strongly that just the threat of using tariffs to achieve non-trade policy objectives is very concerning and will likely contribute to a significant escalation in economic policy uncertainty – even though the current situation has been resolved.
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