Forward-looking business sentiment indicators, such as the manufacturing Purchasing Managers’ Index (PMI) surveys, have deteriorated recently across the world (see chart). Unlike many prior periods of economic weakness where policymakers were willing to wait for confirmation before acting, they now appear poised to act preemptively. In our view, their rationales for a quick response are:
- the looming threat of tariffs
- a more populist political environment
- the fact that it is less costly to stoke a slowing economy than to reignite it
RATE POLICY NOW SUPPORTIVE OF STOCKS: THE FED IS OUR FRIEND
In the US, traders now assume a 100% probability of at least one 2019 rate cut. Thus, we believe the Fed is our friend again and that should be supportive for the secular bull market.
Outside the US, manufacturing is flirting with recession, but we think the cavalry is on the way. Some of the potential fixes proposed just in the last few weeks include cutting interest rates (Fed and ECB), weakening currencies to make exports more competitive (Trump Administration), and restarting or increasing quantitative easing/bond buying programs (ECB & BOJ). China has also been seeking to boost its economy through both monetary and fiscal policy throughout the year. Additionally, recent comments by ECB President Mario Draghi and the nomination of IMF Chairwoman Christine Lagarde as his potential successor lead us to believe that the EU understands that they need to ‘step up the pace’ of accommodation.
SAVERS OFTEN GET PUNISHED WHEN POLICYMAKERS STIMULATE
SAVERS OFTEN GET PUNISHED WHEN POLICYMAKERS STIMULATE
It has been difficult to be a ‘saver’ over the last 10 years. ‘Savers’ are those investors that are typically risk averse and tend to hold cash, CDs, and government bonds. Savers often get punished when policymakers stimulate because low interest rates negatively impact the returns on CDs and bonds. While quantitative easing and fiscal spending can weaken currencies and introduce inflation. For this reason, we adhere to the credo ‘Don’t Fight the Fed’; recognizing that central banks possess the necessary tools and wherewithal to change investor behaviors.
Savers have recently become very familiar with the implications of ‘Fighting the Fed’. In fact, the punishment to savers has been especially acute over the last 10 years in the aftermath of the 2008 Financial Crisis. During this time, policymakers stimulated the economy at an unprecedented pace, which significantly boosted the returns of ‘risky assets,’ like stocks and high yield bonds, while limiting the returns of ‘safe assets,’ like Treasury bonds and cash. The asset class return chart (above) highlights this point, where one can clearly see the outperformance of ‘risky’ assets relative to ‘safe’ assets over the past 10 years.
THE BEATINGS TO SAVERS WILL CONTINUE UNTIL ECONOMIC MORALE IMPROVES
The message from policymakers has been clear: they have no intention of sitting idle while their economies falter. Over the last week policymakers from the US and abroad have commented on the possible ‘fixes’ for slowing global economies including rate cuts, increases in fiscal spending, and additional quantitative easing. Essentially, the message to savers is that the beatings that result from economic policy ‘fixes’ will likely continue until the economic outlook improves. For this reason, we would caution investors to think twice before running to the traditional ‘hiding places’ that become popular during periods of angst. In our view, ‘hiding places’ like cash, CDs, and bonds have become increasingly vulnerable and may not provide the protection investors expect.
CONCLUSION: HOPEFUL, BUT NOT AGGRESSIVELY POSITIONED
Recognizing that risk takers tend to be rewarded when policy makers stimulate the economy, our portfolios are neutral to slightly overweight equities. However, we have been reluctant to increase our equity positions to a larger overweight because of the recent deterioration in two out of three of our economic guideposts, which we refer to as the ‘3 Rs’. The two that recently worsened were ‘Recession Risk’ and ‘Trade Resolution’, while the only one that strengthened was ‘Rates’. Ultimately, we would like to see one of the two remaining ‘Rs’ improve before increasing our overweight to equities.
Important Disclosure Information
The comments above refer generally to financial markets and not RiverFront portfolios or any related performance. Past results are no guarantee of future results and no representation is made that a client will or is likely to achieve positive returns, avoid losses, or experience returns similar to those shown or experienced in the past.
Information or data shown or used in this material is for illustrative purposes only and was received from sources believed to be reliable, but accuracy is not guaranteed.
In a rising interest rate environment, the value of fixed-income securities generally declines.
When referring to being “overweight” or “underweight” relative to a market or asset class, RiverFront is referring to our current portfolios’ weightings compared to the composite benchmarks for each portfolio. Asset class weighting discussion refers to our Advantage portfolios. For more information on our other portfolios, please visit www.riverfrontig.com or contact your Financial Advisor.
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