On Wednesday of last week, the U.S. Congress heard Jerome Powell indicate that the Federal Reserve was readying its plan to stop shrinking its balance sheet, Robert Lighthizer insist that nothing is agreed until everything is agreed in trade talks with China, and Michael Cohen describe the president of the U.S. as a con man.
With that kind of political theater going on, it would normally be difficult to focus anywhere other than Washington, but these are not normal times. President Trump did his best to redirect attention to his summit with Kim Jong Un, a rush of altogether more tragic headlines burst from the 70-year-old tinderbox that is Kashmir, and of course there was more of the seemingly endless debate and machinations around Brexit.
The next three months promise much more of this kind of drama. It will be impossible to ignore, but in our view most political theater is just that: theater. Investors would do well not only to remain focused on the economic data, but also to recognize that political risk that genuinely affects the economy and markets can surprise on the upside as well as the downside.
Big political events are lining up for the spring.
For a while, rumors circulated that Special Counsel Robert Mueller’s report into alleged collusion between Russia and the Trump presidential campaign would be delivered last week. The two-year investigation appears to be nearing its conclusion.
In the U.S.-China trade talks, while President Trump set the scene for a signing ceremony with Xi Jinping in late March, Lighthizer’s hawkish “noises off” suggest twists still to come in this drama. In the meantime, the president now has 75 days to decide his response to the Commerce Department’s Section 232 report on auto imports.
In Europe, within a month, the U.K. may or may not have left the European Union. If it has left, it may or may not have done so with a withdrawal agreement and transition arrangements. At the same time, expectant populists from all sides will be campaigning for May’s European Parliament elections.
Amid all this, the flare-up between nuclear-armed India and Pakistan served as a reminder that decades-old enmities can boil up into geopolitical incidents at any time.
Will these events move markets? Some will and some won’t.
Will they determine medium-term returns to risk assets? They could—but it is always worth remembering that the impact can be positive as well as negative. We have never discounted the possibility that we end up with lower global tariffs should the U.S. sign trade deals with China and Europe this year, for example. The two-week rally in sterling shows how quickly Brexit news flow could become surprisingly market-friendly.
Positive Signs in Recent Data
Ultimately, however, we think investors should look to statistics bureaus rather than political news bureaus for the real determinants of the next 12 – 24 months’ returns—not least because that is where Fed officials are directing their attention.
What do we see there?
As S&P 500 earnings season winds down, both the number of companies reporting above-estimate Q4 earnings and the extent to which aggregate earnings have beaten the consensus are coming in below the five-year average, according to FactSet.
In Europe, Germany is on the edge of recession, and Friday’s final Purchasing Managers’ Index (PMI) prints confirmed that Europe’s manufacturing sector is contracting for the first time since 2013.
In Asia, the latest official manufacturing PMI data from China confirmed a third month of contraction, with the new export orders index hitting a decade low, and Japan again reported weaker-than-expected industrial output.
But it is not all negative. There are also positive signs in recent data.
Erik Knutzen has pointed to surprisingly strong Chinese credit growth, which can be a leading indicator for PMIs—we may have seen early signs of that in Friday’s stronger than expected Caixin manufacturing PMI. Germany’s auto manufacturers face challenges, but its construction sector is booming and January retail sales defied the gloomy sentiment. And in the U.S., Thursday’s Q4 GDP print of 2.6% surprised on the upside, and last week brought further confirmation of robust consumer confidence and a recovering housing market—with new housing permits, mortgage applications and pending home sales all surging.
These signs, together with our belief that China will continue to apply stimulus, and subdued inflation will give central banks the flexibility they need to remain accommodative, inform our view that the global economy, while slowing, is still expanding and can extend this business cycle into 2020.
Be prepared for a lot of political theater to come to a head over the next few months. In our view, however, this economic cycle still has an act or two to play out.
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
- U.S. Building Permits: +0.3% to SAAR of 1.33 million units in December
- U.S. Housing Starts: -11.2% to SAAR of 1.08 million units in December
- S&P Case-Shiller Home Price Index: December home prices increased 0.2% month-over-month and increased 4.2% year-over-year (NSA); +0.2% month-over-month (SA)
- U.S. Consumer Confidence: +9.7 to 131.4 in February
- U.S. GDP Q4 2018 (First Estimate): +2.6% annualized rate
- China Purchasing Managers’ Index: -0.3 to 49.2 in January
- U.S. Personal Income and Outlays: Personal spending decreased 0.5%, income increased 1.0%, and the savings rate decreased to 7.6% in December
- ISM Manufacturing Index: -2.4 to 54.2 in February
What to Watch For
- Tuesday, 3/5:
- ISM Non-Manufacturing Index
- U.S. New Home Sales
- Thursday, 3/7:
- Euro Zone GDP 4Q 2018 (Final Estimate)
- European Central Bank Policy Meeting
- Japan GDP Q4 2018 (Final Estimate)
- Friday, 3/8:
- U.S. Employment Report
Statistics on the Current State of the Market – as of March 1, 2019
|S&P 500 Index||0.5%||0.7%||12.3%|
|Russell 1000 Index||0.5%||0.7%||12.8%|
|Russell 1000 Growth Index||0.7%||0.8%||13.8%|
|Russell 1000 Value Index||0.2%||0.5%||11.8%|
|Russell 2000 Index||0.0%||0.9%||18.1%|
|MSCI World Index||0.5%||0.5%||11.7%|
|MSCI EAFE Index||0.6%||0.3%||9.6%|
|MSCI Emerging Markets Index||-0.6%||0.1%||9.1%|
|STOXX Europe 600||1.3%||0.4%||10.7%|
|FTSE 100 Index||-0.8%||0.5%||6.5%|
|CSI 300 Index||6.6%||2.2%||24.6%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||-0.1%||-0.1%||0.3%|
|Citigroup 10-Year Treasury Index||-0.8%||-0.4%||-0.1%|
|Bloomberg Barclays Municipal Bond Index||0.0%||-0.1%||1.2%|
|Bloomberg Barclays US Aggregate Bond Index||-0.4%||-0.2%||0.8%|
|Bloomberg Barclays Global Aggregate Index||-0.4%||-0.2%||0.7%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||0.5%||0.0%||5.7%|
|ICE BofA Merrill Lynch U.S. High Yield Index||0.5%||0.0%||6.4%|
|ICE BofA Merrill Lynch Global High Yield Index||0.6%||0.0%||5.8%|
|JP Morgan EMBI Global Diversified Index||0.1%||-0.2%||5.2%|
|JP Morgan GBI-EM Global Diversified Index||-0.4%||-0.5%||3.8%|
|U.S. Dollar per British Pounds||1.4%||-0.4%||4.0%|
|U.S. Dollar per Euro||0.4%||0.0%||-0.4%|
|U.S. Dollar per Japanese Yen||-1.0%||-0.5%||-2.0%|
|Real & Alternative Assets|
|Alerian MLP Index||-1.1%||0.7%||13.7%|
|FTSE EPRA/NAREIT North America Index||-1.9%||-0.7%||11.6%|
|FTSE EPRA/NAREIT Global Index||-1.2%||-0.2%||10.2%|
|Bloomberg Commodity Index||-1.4%||-0.5%||6.0%|
|Gold (NYM $/ozt) Continuous Future||-2.5%||-1.3%||1.4%|
|Crude Oil (NYM $/bbl) Continuous Future||-2.5%||-2.5%||22.9%|
Source: FactSet, Neuberger Berman.