November 2018

The World As We See It

Download Full PDF
Download Full CommentaryPrint Full PDF
Download Full CommentaryPrint Full PDF
Download Full CommentaryPrint Full PDF
1. Global Market Returns
2. Rising Rates Supportive of U.S. Dollar
Download Full CommentaryPrint Full PDF

World Markets in 2018

This year’s pressure on global equities hit U.S. markets in October; with company fundamentals still strong, the sell-off was perhaps a matter of the U.S. valuations getting a little too far ahead of global peers.

U.S. Treasuries came under pressure as the market priced in higher real interest rates. Lacking the spread cushion of high-yield corporates, investment-grade credits followed Treasuries into negative territory.

The U.S. dollar continued to appreciate vis-à-vis developed market peers given the Fed’s apparent commitment to continuing along its rate-hike path.

Download Full CommentaryPrint Full PDF

World Markets in 2018

Unlike 2017, which saw double-digit gains across much of the global equities universe, the U.S. – to date – is one of the few markets to generate positive returns in 2018, driven in part by consensus-beating earnings.

Global bonds have had a challenging 2018. Rate hikes by the Fed pushed up yields on U.S. Treasuries – making them more attractive – and the prospect of an eventual exit from accommodative monetary policy in Europe and Japan has weighed on global sovereigns.

Download Full CommentaryPrint Full PDF
Download Full CommentaryPrint Full PDF
1. Global Growth Outlook
2. Global Consumer Price Inflation Forecasts
3. U.S. Employment Outlook
4. Global Purchasing Managers’ Indices
5. Europe’s Measured Recovery Continues
Download Full CommentaryPrint Full PDF

Global Growth Outlook

The U.S. economy continues to print strong numbers, with third-quarter annualized U.S. real GDP growth at 3.5%.

Headwinds appear to be gathering for 2019, however. Brexit hangs over the UK and political risk in the eurozone adds to the concerns about whether the economy is resilient enough to withstand the eventual removal of highly accommodative monetary policy.

Despite the potential global benefits of U.S. tax reform, rising trade barriers and geopolitical tensions may also be factors that could torpedo what had been a story of converging global growth.

Download Full CommentaryPrint Full PDF

Global Consumer Price Inflation Forecasts

A rising U.S. dollar, along with continued technological innovation, are two potentially disinflationary forces at play in the U.S. economy. Markets reflect this as the inflation rate implied in TIPS markets from two to 10 years out are at 2.1% or lower.

Yet, with inflation at the Fed’s 2% and possibly little slack remaining in the labor market, 2019 could present an upward surprise in prices. Another inflationary risk may be higher prices for imports due to tariffs on a range of goods.

A stronger greenback could also push inflation higher for countries dependent on commodities imports as many of these inputs are priced in U.S. dollars.

Download Full CommentaryPrint Full PDF

U.S. Employment Outlook

The U.S. unemployment rate, at 3.7%, is the lowest level since 1969. Labor market tightness may have stanched the decline in the labor force participation rate as idle workers are incentivized to rejoin the labor force.

Importantly, competition for workers may push wages up. This would be welcome as wage growth has remained stubbornly low for much of the post-crisis period.

Larger pay checks would put more dollars in consumers’ wallets, yet also could be a source of higher input costs for companies as wages are a material source of inflation in a service-based economy.

Download Full CommentaryPrint Full PDF

Global Purchasing Managers’ Indices

The final few months of 2018 will shed additional light on whether weakening global PMIs portend a marked slowdown in economic growth.

It also remains to be seen if U.S. PMIs continue to shine or if the weight of tariffs and an extended business cycle take their toll.

Download Full CommentaryPrint Full PDF

Europe’s Measured Recovery Continues

Optimists point to a declining unemployment rate and steady household consumption within the eurozone as growth plods along.

The potential for a breakout in growth, however, may be limited until companies show the confidence to tap local credit markets, as bank loans are a major source of funding on the continent.

Without making (often debt-financed) capital investment, the European economy may find it difficult to increase productivity, a major ingredient of economic growth.

Download Full CommentaryPrint Full PDF
Download Full CommentaryPrint Full PDF
1. Monetary Policy: Tapering Has Begun
2. Expected Fed Balance Sheet Taper
3. Rising Rates Supportive of U.S. Dollar
Download Full CommentaryPrint Full PDF

Monetary Policy: Tapering Has Begun

The U.S. has commenced balance sheet tapering with the Fed expected to allow up to $50 billion per month in Treasuries and mortgages to mature without reinvesting.

The European Central Bank has announced it will cease buying new assets in December, although it plans to keep rates on hold at least through the summer of 2019.

It appears that only the Bank of Japan will remain active buyers after this year. However, the recent pace of balance sheet expansion has slowed.

Download Full CommentaryPrint Full PDF

Expected Fed Balance Sheet Taper

Even if the Fed follows through on its plans to reduce its balance sheet by $50 billion per month, total assets will remain well above its pre-crisis level of just under $1 trillion.

The economy has been able to handle this large amount of liquidity as the velocity of money – at 1.45% – remains well below its long-term average.

Given the amount of cash in the system, only a small increase in monetary velocity could result in a snapback of inflationary pressure.

Download Full CommentaryPrint Full PDF

Rising Rates Supportive of U.S. Dollar

The stronger U.S. dollar is largely the function of higher interest rates relative to the rest of the world as foreign buyers seek exposure to the appreciating currency.

A rising dollar, however, can negatively impact U.S. exporters as their goods become more expensive for foreign buyers.

Historically, dollar rallies have punished emerging markets, especially those with a considerable U.S.-dollar denominated debt load.

Download Full CommentaryPrint Full PDF
Download Full CommentaryPrint Full PDF
1. U.S. Stock Volatility Year to Date
2. Stock Correlations
3. Forward P/E Ratios by Sector – U.S. Stocks
4. Growth vs. Value
5. Returns by Market Cap
Download Full CommentaryPrint Full PDF

U.S. Stock Volatility Year to Date

October’s strong market moves reinforce the notion that investors face more normal – that is, higher – volatility.

Along with a wider range of potential economic outcomes, due in part to tit-for-tat tariffs, higher volatility is the consequence of higher real interest rates as investors are less incentivized to sell volatility – which can suppress market swings – as investors can once again generate income in safer short-term debt and money markets.

Download Full CommentaryPrint Full PDF

Stock Correlations

The recent sell-off saw stock correlations in the U.S. tick up slightly, but for most of the year the trend has been a divergence of fortunes among companies.

Going forward, so-called overarching beta trades may prove less effective as stocks will need more than broad bullish sentiment to push levels higher. Instead, companies will increasingly rely upon their own prospects for earnings growth.

As stocks’ fortunes diverge, an active manager’s ability to identify companies with the most attractive business models and avoid those that are structurally challenged will possibly prove crucial in generating excess returns.

Download Full CommentaryPrint Full PDF

Forward P/E Ratios by Sector – U.S. Stocks

Valuation multiples have decreased across nearly all U.S. large-cap stock sectors. Only the historically defensive telecommunications sector has seen its favorability among investors increase.

It is important to note that earnings data remain strong, so the recent volatility has largely been caused by a recalibration of the valuation multiple attached to earnings rather than the earnings prospects themselves.

When focusing on company fundamentals, volatility and falling valuations can present attractive entry points for advantaged companies that may not have been as compelling an investment only a few months ago.

Download Full CommentaryPrint Full PDF

Growth vs. Value

For much of the post-crisis era, growth has outperformed value as investors were willing to pay a premium for growth in a tepid economic environment.

While the promise of “rising tides” saw value stocks briefly keep pace with growth in the immediate aftermath of the 2016 U.S. election, the latter category once again has been the place to be despite a strong economic backdrop.

Download Full CommentaryPrint Full PDF

Returns by Market Cap

Market gains have been relatively narrow, with them being especially concentrated in the large- and mega-cap space.

Many of the strongest outperformers have been high-profile mega-cap tech companies and consumer discretionary companies with technology integral to their business models.

Download Full CommentaryPrint Full PDF
Download Full CommentaryPrint Full PDF
1. International Stock Performance
2. European & U.S. Price/Earnings Ratios
3. Emerging Market Equity Performance
4. MSCI World EPS Growth Forecast (YoY%)
Download Full CommentaryPrint Full PDF

International Stock Performance

U.S. stock outperformance vs. developed market peers has accelerated during 2017 and 2018, driven by a combination of business-friendly reforms and favorable corporate earnings.

This run, however, has made U.S. stocks expensive relative to these other countries.

Compared to its long-term, cyclically adjusted P/E ratio, U.S. stocks also appear expensive by historical standards while other markets are trading closer to their long-term averages.

Download Full CommentaryPrint Full PDF

European & U.S. Price/Earnings Ratios

The October sell-off brought valuations down in both the U.S. and Europe, with those of the latter now trading close to their long-term average.

While lower valuations may reflect slower growth, geopolitical risks or other factors that may widen the range of economic outcomes, the sell-off’s indiscriminate nature may also present attractive entry points.

Download Full CommentaryPrint Full PDF

Emerging Market Equity Performance

A bad 2018 for emerging markets got worse during the autumn.

The potential for higher returns in U.S. markets was just one factor weighing on EM stocks. Also contributing to their troubles were concerns that new trade barriers could adversely impact established global supply chains, especially those that flow through China.

Download Full CommentaryPrint Full PDF

MSCI World EPS Growth Forecast (YoY%)

The trend for much of the post-crisis era has been for the market to dial back optimistic earnings estimates.

That changed over the past two years when initial projections were upgraded as earnings trajectories became more visible.

It remains to be seen if heightened optimism is the rule for 2019, or if trade and other headwinds lead to a more measured consensus view.

Download Full CommentaryPrint Full PDF