There has been no shortage of drama across the macroeconomic and geopolitical landscape so far in 2019. However, it appears that investors may be tuning out much of the political theatre around them. Which storylines are moving markets now, and which may become more integral to the plot in the weeks ahead?
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Students of history may recall the War of the Roses, which was waged more than 500 years ago. It was an epic battle between two rival branches of the English royal family that both had claims to England’s throne – the House of Lancaster, represented by a red rose, and the House of York, represented by a white rose. While the House of Lancaster ultimately won the War of the Roses, by some measures there was no real winner. The war lasted for many years and resulted in very significant damage to both houses. In fact, by the end of the war, the male lines in both houses had been eliminated.
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At the start of 2018, I warned about two significant forms of disruption that posed risks to markets: geopolitical disruption and monetary policy disruption. The solution to the global financial crisis – experimental monetary policy – had created greater wealth inequality, which had led to geopolitical disruption, and the situation was poised to worsen in 2018. This experimental monetary policy, especially large-scale asset purchases, was beginning to be unwound – and that was an experiment in and of itself which also had the potential to cause disruption.
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Last week saw major swoons in the stock market and U.S. Treasuries. As of this writing, the sell-off has been continuing. However, I still hold out hope that we could see stocks finish higher than where they are now by year-end. Yes, Virginia, there still is the possibility of a “Santa Pause.”
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U.S. stocks began a dramatic sell-off on Tuesday that has continued and spread to other parts of the world, creating intense headlines across the globe on Thursday. There has been a flight to the perceived safety of sovereign debt. The yield on the 10-year U.S. Treasury fell dramatically, from more than 3% at the start of the week to 2.83% as of this writing1 – and other major sovereign debt yields also followed suit. Some areas of the yield curve inverted, and the 2-year/10-year yield curve is in danger of inverting.
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When I was in high school, I worked as a lifeguard. I loved the job, but I was always aware of the enormous responsibility that came with it. I found the key to success was to anticipate trouble before it happened – to watch swimmers for any early signs of distress before they ever came close to drowning. Today, I see similarities between lifeguards and policy-makers such as the U.S. Federal Reserve (Fed), which must try to anticipate economic downturns before they start. For the past several weeks, I have written in my blog that signs of a global slowdown are starting to appear. The good news is that policy-makers appear to be reacting to those early signs – which I believe could help spur a “Santa Pause” rally for markets.
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Stocks continued to slide last week, and most major indices are negative for the year-to-date period – some having posted double-digit losses. As I noted in my commentary last week, there are hints of an economic slowdown appearing. In this environment, expectations are increasing that central banks may loosen their monetary policy in response, but I’m not sure that central banks will come to the rescue this time. In fact, I believe central banks are more likely to be a risk factor going forward.
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This past weekend, I had the opportunity to see a production of Macbeth. Though I’ve heard the words many times before, I was particularly fixated by a verse from one of the witches: “By the pricking of my thumbs, something wicked this way comes.” The “pricking of thumbs” was originally intended to represent the historic belief that people could sense when evil was approaching. However, I couldn’t help but think this was a timely analogy for the sensations some market participants are feeling that an economic slowdown is approaching.
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Last week, the U.S. experienced a deepening split in political leadership, which dominated headlines. And yet, that was just the tip of the iceberg in terms of events that are impacting global markets. Below, I recap five key events from last week and highlight five issues to watch moving forward, including whether there are grounds for new alliances among U.S. President Donald Trump and the Democratic House.
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October has come to an end – and what a miserable month it was for stocks. The Dow Jones Industrial Average fell more than 5%, the S&P 500 Index lost 6.9% (its worst month in seven years) and the Nasdaq Composite Index dropped 9.2% (its worst month since November 2008).1 Looking beyond the U.S., the MSCI EAFE Index gave up 8% during the month while the MSCI Emerging Markets Index lost 8.7%.1 And beyond stocks, major bond indices, such as the Bloomberg US Aggregate Bond Index and the FTSE Russell Emerging Markets Broad Bond Index, also gave up some ground.1 Real estate investment trusts lost 3% as represented by the MSCI REIT US Index, while commodities lost 2% as represented by the Bloomberg Commodity Index.1 One of the few bright spots in October was gold, with spot prices rising 2.8%.1
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Once again, the month of October has been living up to its frightful reputation for wreaking havoc on stock prices: 1929 and 1987 are prime examples, and we can now safely say that 2018 will also go down in history as an illustration of October’s ability to scare investors. Unfortunately, I don’t foresee this volatility easing too much over the next few weeks.
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There was no rest for the weary last week, as geopolitical developments came fast and furious, and capital markets reacted. Below, I cover five important issues that have continued to contribute to stock market volatility – some of which flew under the radar during the week’s flood of news – and highlight five issues to watch this week.
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Trade tensions have escalated in recent months to a point we haven’t seen in many years. At times in the past year, protectionist threats and actions have sent stocks downward, but investors have been all too willing to believe the threat has passed at the first sign of an abatement in trade drama. For example, after downward pressure on stocks caused by trade worries, Chinese President Xi Jinping’s conciliatory speech at the Boao Forum in March was all investors needed to hear to send stocks upward. But the elation was short-lived, as it soon became clear that President Xi had no interest in making serious concessions.
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It was yet another week in which I felt like we lived 100 weeks. Of course the biggest event was the stock market sell-off. U.S. stocks led what became a global sell-off, which slowed and actually began to reverse on Friday. The key question on investors’ minds is: Is this over? Or will stocks lose more ground? Before we can gauge the likelihood of this sell-off continuing, we must understand its origins. There were two catalysts for the stock market drop – and they are the two key risks I have been warning about for more than a year: U.S. Federal Reserve (Fed) normalization and trade.
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On Wednesday, U.S. stocks fell dramatically, with the Dow Jones Industrial Average falling more than 800 points. The rout was led by technology stocks, with the NASDAQ Composite Index down 316 points, but all sectors experienced losses.1 This was the worst one-day sell-off for U.S. stocks since February. For much of the day, bonds sold off as well but, by the end of the day, investors fled to the perceived safety of U.S. Treasuries, sending yields lower.
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Last week was particularly busy, with key data releases giving us the latest glimpse into economic activity around the world, and government negotiations establishing the boundaries of important trading relationships. Here’s what we learned, and what we need to watch going forward.
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Perhaps the biggest news of the last week was the meeting of the Federal Open Market Committee (FOMC), the policy-making arm of the U.S. Federal Reserve (Fed). As expected, the Fed raised interest rates. But what was far more interesting were the hints provided about the future. In this blog, I discuss my outlook for the Fed and highlight five issues to watch in October.
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Last week brought bad news on trade and Brexit, yet stocks globally shrugged off the news and rose higher. In the U.S., the S&P 500 Index hit new highs (albeit on low breadth), while the yield on the 10-year Treasury bond surpassed the key 3% level.1 Because the 10-year U.S. Treasury yield tends to be a far more accurate fear gauge than any equity indicators (such as the VIX), I can’t help but be fixated on a few questions: Why did the 10-year yield rise? And where will it go from here?
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The next few months will be critical for several countries as they hold elections that could either significantly change their leadership or endorse the status quo. In this blog, I preview the choices ahead for Japan, Brazil and the U.S.
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Every week I hope that there are no new trade developments, so that for at least one week I can spare you all from a trade discussion in this blog. Unfortunately, this is not that week – there were many trade developments over the past few days, and I feel compelled to discuss them because I firmly believe the trade situation poses a significant risk to the economy and markets.
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