I spent a week in Japan recently, and although sumo contests weren’t part of my itinerary, I did have a chance to watch and reflect as global markets wrestled with unfriendly forces and the investment crowd grew restless.
The news has been bleak in many respects. There’s growing consensus that a U.S.-China trade deal, after seeming within grasp just a few weeks ago, will be postponed until year’s end or beyond, if it happens at all. Economic data have been disappointing, with the closely watched U.S. PMI hitting a mediocre 50.9—barely growth territory. Expectations for U.S. expansion have been slipping, with the GDPNow tracker anticipating a 1.3% pace for 1Q and a number of economists cutting growth expectations to less than 2%. In Europe, German unemployment rose for the first time in two years, and manufacturing activity remains weak.
Adding to this has been gloom in the bond market: The 10-year U.S. Treasury yield recently hit its lowest level since 2017, the yield curve remains inverted (if sustained, often associated with eventual recession) and many European bonds are carrying negative yields, with German 10-year Bunds now trading lower than equivalent Japanese bonds.
The cumulative effect on equities has been negative, with the S&P 500 and MSCI EAFE indices down about 6% ansd 5% for May, respectively, although still up 11% and 8% for the year. The MSCI Emerging Markets index has lost 7% for the month and is up 4% year-to-date.
What Happens Next?
Today, the key question is whether conditions will continue to slow, or stabilize and potentially reaccelerate in the second half of the year. Beyond PMI statistics, U.S. durable goods and business investment have softened. On the other hand, consumer confidence, employment, wage growth and productivity gains are all encouraging. Inflation remains low, giving central banks leeway to remain accommodative. In Japan, my conversations with economists and analysts suggested the government is unlikely to postpone a demand-impeding VAT tax increase, while China just saw a modest downturn in manufacturing PMI to 49.4 after two months of growth. European Parliamentary elections produced fewer gains for radical political parties than expected, hopefully limiting policy upheaval.
That said, we have long anticipated a slowdown in global growth from 2018 highs, and perhaps this is what that slowing looks like—albeit of longer duration than some expected. At this point, we are not overly worried that current weakness will lead to a more significant shift in economic outlook requiring changes to asset allocation. The Fed’s bias toward loose policy (with the next move on rates likely lower than higher from here) and China’s continued stimulus are two pillars that—recent disappointments aside—should, in our view, help stabilize the global economic environment.
An Ongoing Risk
What could threaten that scenario? Perhaps the main danger is that geopolitical and trade tensions will undermine confidence. The U.S. presidential election, tax cuts and regulatory reform supported business and consumer psychology from late 2016 to 2018, but trade-related uncertainties are already offsetting those gains. Potential auto tariffs, although delayed, remain on the horizon, while President Trump just threatened Mexico with tariffs over migration concerns even as the Mexico-U.S.-Canada trade agreement awaits Congressional approval.
On China, I remain in the more optimistic camp—that eventually some accommodation will be reached—although it’s clear that structural issues around intellectual property, technology transfer and subsidies will be difficult to resolve in the short run. The G-20 will meet in late June, where Xi and Trump are likely to face off. In the meantime, don’t be surprised to see rhetorical feints and parries from both sides, as well as corresponding gyrations from financial markets.
Overall, we remain steadfast in our current asset allocation views but will be watchful on economic and market signals, bearing in mind John Maynard Keynes’s words, “When my information changes, I alter my conclusions.” He wasn’t sitting ringside for the geo-economic grappling match we see before us, but the lesson remains a valid one.
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
- S&P Case-Shiller Home Price Index: March home prices increased 0.7% month-over-month and increased 2.7% year-over-year (NSA); +0.1% month-over-month (SA)
- U.S. Consumer Confidence: +4.9 to 134.1 in May
- U.S. 1Q 2019 GDP (Second Estimate): +3.1% annualized rate
- China Purchasing Managers’ Index: -0.7 to 49.4 in May
- U.S. Personal Income and Outlays: Personal spending increased 0.3%, income increased 0.5% and the savings rate increased to 2.8% in April
What to Watch For
- Monday, 6/3:
- ISM Manufacturing Index
- Tuesday, 6/4:
- Euro Zone Consumer Price Index
- Wednesday, 6/5:
- ISM Non-Manufacturing Index
- Thursday, 6/6:
- Euro Zone 1Q 2019 (Final Estimate)
- Friday, 6/7:
- U.S. Employment Report
- European Central Bank Policy Meeting
Statistics on the Current State of the Market – as of May 31, 2019
|S&P 500 Index||-2.6%||-6.4%||10.7%|
|Russell 1000 Index||-2.5%||-6.4%||11.0%|
|Russell 1000 Growth Index||-2.1%||-6.3%||13.7%|
|Russell 1000 Value Index||-3.0%||-6.4%||8.5%|
|Russell 2000 Index||-3.2%||-7.8%||9.3%|
|MSCI World Index||-2.3%||-5.7%||10.1%|
|MSCI EAFE Index||-1.8%||-4.7%||8.0%|
|MSCI Emerging Markets Index||1.2%||-7.2%||4.2%|
|STOXX Europe 600||-2.2%||-5.5%||8.7%|
|FTSE 100 Index||-1.5%||-2.9%||8.8%|
|CSI 300 Index||1.2%||-6.9%||21.1%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||0.4%||0.8%||1.9%|
|Citigroup 10-Year Treasury Index||1.7%||3.4%||5.9%|
|Bloomberg Barclays Municipal Bond Index||0.4%||1.4%||4.7%|
|Bloomberg Barclays US Aggregate Bond Index||0.9%||1.8%||4.8%|
|Bloomberg Barclays Global Aggregate Index||0.6%||1.4%||3.3%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||-0.4%||-0.7%||6.6%|
|ICE BofA Merrill Lynch U.S. High Yield Index||-0.6%||-1.3%||7.5%|
|ICE BofA Merrill Lynch Global High Yield Index||-0.5%||-1.2%||6.6%|
|JP Morgan EMBI Global Diversified Index||0.2%||0.4%||7.7%|
|JP Morgan GBI-EM Global Diversified Index||0.6%||0.3%||3.0%|
|U.S. Dollar per British Pounds||-0.7%||-3.3%||-1.0%|
|U.S. Dollar per Euro||-0.5%||-0.6%||-2.5%|
|U.S. Dollar per Japanese Yen||0.7%||2.6%||1.0%|
|Real & Alternative Assets|
|Alerian MLP Index||-2.7%||-1.1%||13.9%|
|FTSE EPRA/NAREIT North America Index||-1.8%||-0.1%||15.4%|
|FTSE EPRA/NAREIT Global Index||-1.6%||-0.9%||12.7%|
|Bloomberg Commodity Index||-1.2%||-3.4%||2.3%|
|Gold (NYM $/ozt) Continuous Future||2.1%||2.0%||2.3%|
|Crude Oil (NYM $/bbl) Continuous Future||-8.7%||-16.3%||17.8%|
Source: FactSet, Neuberger Berman.