Another week, another list of new records and extremes in global financial markets, driven by another slew of bets that the Federal Reserve is about to deliver its first rate cut in more than a decade.
Last Wednesday morning, the S&P 500 Index took a peek over the 3,000 line. By the time we publish, it may have settled there. Ten-year yields in Greece, which only exited its emergency bailouts a year ago and returned to debt markets in March, briefly traded below the 10-year U.S. Treasury yield. The yield on Poland’s 10-year bond came within a few basis points of joining the world’s $13 trillion pile of negative-yielding debt.
We are in strange times. Demand for risky assets appears insatiable, and yet the rush to support a stuttering economy with lower rates appears unstoppable.
Completing the Pivot
Even as the latest, strong data on nonfarm payrolls came in, markets were still pricing in a 25-basis-point rate cut for July. After last week’s comments from Fed Chair Jerome Powell, indicating the jobs print “did not shift” the FOMC’s outlook and that “many” members see a strengthened case for accommodative policy, that cut was being priced as a near-certainty and 50 basis points was being rated as a one-in-four probability. Given where the monetary policy debate was last fall, that is a stunning pivot.
That pivot is pushing up the value of the S&P 500, crisis-prone sovereigns, emerging markets and all other risky assets. But, as Erik Knutzen pointed out last week, small caps, high-beta stocks and non-U.S. markets have lagged more defensive assets. Let’s not forget that German government paper sits at the bottom of that pile of negative-yielding debt.
That indicates underlying caution. Risk aversion would be an understandable response to this year’s faltering Purchasing Managers’ Index readings, soft inflation prints, declining economic growth forecasts, political uncertainties and rising global trade tensions. After a so-so first quarter of earnings reports, the season just getting underway is expected to deliver near-flat growth overall, with the consumer and technology sectors making up for the pounding expected in autos and industrials.
It feels a little futile to try to relate market pricing to company or macroeconomic fundamentals at the moment, however—whether that’s the high price of safe havens, the high levels in equity indices or the low price of riskier equities. Right now, everything seems to be about rates. Almost anything that generates income, anything with even a suggestion of duration, trades as if it promises impossibly unlimited upside.
The old adage warns investors not to “fight the Fed.” Today, far from fighting it, markets are almost goading the central bank to go further and take rates lower.
Pockets of Value
Our view on fundamentals has not changed a great deal since the beginning of the year.
We expected the global economy to slow but stabilize, and the U.S.-China trade dispute to quiet down a bit. Given where we are now, however, we would acknowledge that any headline agreement is unlikely to address the difficult, longer-term issues that have risen to the top of the U.S.’s agenda. And, yes, we have gone from expecting central banks to pause and hold rates to acknowledging that a cut is on the way.
Nonetheless, we may be over the worst of the uncertainty on trade, and we still anticipate a short easing cycle from the Fed, rather than the prolonged cycle that the markets seem to be pricing in. On their own, those will likely not be enough to boost growth prospects meaningfully. Along with some rising inflation later this year, however, they are likely to help extend this cycle at a lower, but stable, trend rate of growth.
With that in mind, as Erik suggested, we think it is time to start thinking about where the current rates-driven sentiment is creating pockets of value to dip into. By all means, don’t fight the Fed. But don’t get dragged along by it, either.
Joseph V. Amato is President of Neuberger Berman Group LLC and Chief Investment Officer—Equities at Neuberger Berman. He is also a member of the firm’s Board of Directors and its Audit Committee. To learn more, see Mr. Amato's bio or visit www.nb.com.
In Case You Missed It
- China Consumer Price Index: +2.7% year-over-year in June
- U.S. Consumer Price Index: +0.1% in June month-over-month and +1.6% year-over-year (core CPI increased 0.3% month-over-month and 2.1% year-over-year)
- U.S. Producer Price Index: +0.1% in June month-over-month and +1.7% year-over-year
What to Watch For
- Monday, 7/15:
- China 2Q 2019 GDP
- Tuesday, 7/16:
- U.S. Retail Sales
- NAHB Housing Market Index
- Wednesday, 7/17:
- U.S. Housing Starts and Building Permits
- Thursday, 7/18:
- Japan Consumer Price Index
- Friday, 7/19:
- Euro Zone 2Q 2019 GDP (Final)
Statistics on the Current State of the Market – as of July 12, 2019
|S&P 500 Index||0.8%||2.5%||21.5%|
|Russell 1000 Index||0.8%||2.5%||21.9%|
|Russell 1000 Growth Index||1.2%||3.3%||25.5%|
|Russell 1000 Value Index||0.4%||1.8%||18.3%|
|Russell 2000 Index||-0.3%||0.3%||17.3%|
|MSCI World Index||0.4%||1.6%||19.3%|
|MSCI EAFE Index||-0.5%||0.0%||14.5%|
|MSCI Emerging Markets Index||-0.7%||-0.1%||10.7%|
|STOXX Europe 600||-0.6%||-0.6%||15.3%|
|FTSE 100 Index||-0.6%||1.1%||14.4%|
|CSI 300 Index||-1.8%||0.1%||28.6%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||0.1%||-0.1%||2.3%|
|Citigroup 10-Year Treasury Index||-0.5%||-0.9%||6.5%|
|Bloomberg Barclays Municipal Bond Index||0.3%||0.4%||5.5%|
|Bloomberg Barclays US Aggregate Bond Index||-0.2%||-0.4%||5.7%|
|Bloomberg Barclays Global Aggregate Index||-0.2%||-0.6%||4.9%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||0.2%||0.5%||7.3%|
|ICE BofA Merrill Lynch U.S. High Yield Index||0.0%||0.2%||10.3%|
|ICE BofA Merrill Lynch Global High Yield Index||0.0%||0.1%||9.7%|
|JP Morgan EMBI Global Diversified Index||-0.3%||0.3%||11.6%|
|JP Morgan GBI-EM Global Diversified Index||0.5%||0.8%||9.6%|
|U.S. Dollar per British Pounds||0.4%||-1.3%||-1.4%|
|U.S. Dollar per Euro||0.3%||-1.2%||-1.6%|
|U.S. Dollar per Japanese Yen||0.4%||-0.3%||1.6%|
|Real & Alternative Assets|
|Alerian MLP Index||1.0%||3.0%||20.5%|
|FTSE EPRA/NAREIT North America Index||0.1%||2.4%||19.7%|
|FTSE EPRA/NAREIT Global Index||-0.2%||2.2%||17.9%|
|Bloomberg Commodity Index||2.5%||1.8%||7.0%|
|Gold (NYM $/ozt) Continuous Future||0.9%||-0.1%||10.2%|
|Crude Oil (NYM $/bbl) Continuous Future||4.7%||3.0%||32.6%|
Source: FactSet, Neuberger Berman.