The investing world is understandably focused on the U.S. After all, it’s the biggest economy, has the largest stock market, is home to the some of the best-known companies and, admittedly, the political spectacle in Washington can be entertaining at times. As a result, the U.S. frequently steals the limelight from its neighbor to the north.
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On Saturday evening, Oct. 20, 1973, U.S. President Richard Nixon ordered Attorney General Elliot Richardson, Deputy Attorney General William Ruckelhaus, and Solicitor General Robert Bork to fire independent special prosecutor Archibald Cox, resulting in the resignations of Richardson and Ruckelhaus and the dismissal of Cox. In the month after this so-called “Saturday Night Massacre,” the U.S. equity market, as represented by the S&P 500 Index, fell by more than 10%.1 By the time Nixon resigned almost a year later, U.S. equities had fallen by 26%, and ultimately by 39% at the trough.1
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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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Many investors may be facing a catch-22 situation in their portfolios. Recent strong returns in the global bond market may have pushed their fixed income weighting beyond their strategic allocation. But the return of equity market volatility may leave them wary of re-allocating their bond gains into stocks.
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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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The U.S. Federal Reserve (Fed) cut interest rates by 25 basis points Wednesday to a range between 1.75% and 2%, as widely expected by markets. However, the Fed’s economic projections showed that the median Federal Open Market Committee (FOMC) member does not expect to cut rates again this year, marking potential disagreement among FOMC members and with markets; the bond market is currently pricing an additional rate cut this year and some FOMC members have expressed interest in future cuts.
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Investors frequently focus on the yield to maturity that bonds pay, rather than recognizing the potential total returns that are available to global fixed income investors.
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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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The yield curve has been a constant topic of conversation among investors since mid-August, when the 2-year/10-year Treasury curve briefly inverted and launched furious speculation that a recession may be around the corner. The same holds true among Invesco’s market strategists, who have been debating what an inverted yield curve means and whether a recession is indeed inevitable.
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This week, we are going to take a deeper dive into the issues currently facing the U.S., Europe, and China. Guiding us through this “regional roundup” are three of Invesco’s Global Market Strategists who are on the ground in New York, London and Hong Kong. While the details differ in each region, the biggest commonality they report is the heavy shadow of uncertainty that continues to linger over markets.
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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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As we embarked on this year, I expected 2019 to be the year of slower growth but better policy. And that, I posited, would be better for financial markets than 2018’s combination of strong growth and bad policy, specifically Federal Reserve (Fed) interest rate hikes and trade tariffs.
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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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Argentina’s presidential primary elections shocked investors Sunday when President Mauricio Macri suffered a major defeat against leftist politician Alberto Fernandez, whose running mate is controversial former president Cristina Kirchner. According to the official election results, Macri received 32% support while Fernandez received 48%, a much wider margin than expected. Election authorities reported high voter turnout at 75%, and Fernandez won every province except Cordoba and the City of Buenos Aires.
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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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The U.S. Federal Reserve (Fed) cut rates by 0.25% for the first time in over a decade,1 a move largely expected by the market. Heading into the July Federal Open Market Committee (FOMC) meeting, much of the debate was around whether or not the Fed would deliver 25 or 50 basis points. However, we were focused on the statement and Fed Chairman Jerome Powell’s press conference for further insight on future policy. Future policy, or the Fed’s reaction function, is particularly important as we navigate in an environment where we believe market pricing indicates more cuts than our economic outlook would imply.2
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