Headlines on the front page of the newspapers have been propelling markets again over the past two weeks.
Earlier in the year, the dovish turn by the major central banks, the willingness of China’s authorities to apply stimulus to the economy and positive messaging on trade negotiations from the U.S. administration supported a return to a pro-risk environment. Since the trade talks were abruptly thrown off course two weeks ago, markets have pitched about in response to official statements, mood music and opinion columns. Are the two presidents still talking to one another? Is the U.S. opening a new front in this battle with its declaration of a telecom “national emergency”?
Issues around trade can be profoundly important for the global economy. As we argued in some of our long-range thinking last summer, criticism of the institutions of market capitalism and global trade are likely to be a feature of our newly fractious global order for years to come. But trying to manage portfolios in response to front-page headlines on anything, including trade negotiations, is a hopeless task.
At this stage in the cycle, it is important to look for signs of stress closer to the fundamentals of the economy. The prudent investor thinks about the business cycle more than the news cycle. How are consumers and chief executives feeling? What is happening to financial conditions? These are likely to tell us more about economic prospects for the second half of the year than the latest moves on the geopolitical chessboard.
In our views from earlier in the year, we were confident that investors had overreacted to the growth scare at the end of 2018 and that dovish central banks and China’s interventions would persuade them back into risk assets.
But we also cautioned that the fundamental improvements we expected were unlikely to be clearly evident until the second half of this year. Until then, mixed economic data and tepid earnings growth could well generate disappointment and volatility. This is the nature of late-cycle dynamics. The return of the “Goldilocks” meme was no reason to be complacent.
Sure enough, the first quarter saw equity markets rally strongly against the background of a so-so earnings season: The forward price-to-earnings ratio of the S&P 500 Index rose from around 14 times to 17 times. While we, like many others, thought that a new tussle with Europe was more likely than a deterioration of the U.S.-China talks, a flare-up around trade was always a looming catalyst for investors to book some of those profits.
Throughout that time, underlying fundamental data continued to be mixed. Improvements in Germany’s releases are especially encouraging against lingering concerns about growth and inflation in the euro zone. The all-important performance of China remains volatile, but official readiness to intervene is reassuring. Japan remains a worrisome weak link—and we are currently checking the data for any foundational problems there. On the whole, however, this fits with our view that we would need to wait until the second half of the year for the global economy to firm up.
Opportunities to Add Risk
Nonetheless, we pause at the business pages rather than the front pages, scour our industry research, monitor the data and listen carefully to the senior company management we meet and engage with every day, alive to any challenges to that view.
Persistent strength in the U.S. dollar would indicate a difficult tightening of global financial conditions, for example. A dip in sales might signal the beginnings of consumer fatigue. A change in the direction of key hiring metrics could be an early warning that chief executives are becoming less confident.
Until then, we will evaluate dips in sentiment around awkward central bank messaging or trade disputes as opportunities to add risk judiciously, looking to position portfolios for the more robust economic news we believe we may see over the coming months.
Erik Knutzen, CFA, CAIA and Managing Director, is Co-Head of the Neuberger Berman Quantitative and Multi-Asset Class investment team and Multi-Asset Class Chief Investment Officer. Erik joined in 2014 and is responsible for leading the management of multi-asset portfolios, driving the asset allocation process on a firm-wide level, as well as engaging with clients on strategic partnerships and multi-asset class and quantitative solutions. To learn more, see Mr. Knutzen’s bio or visit www.nb.com.
In Case You Missed It
- U.S. Retail Sales: -0.2% in April
- NAHB Housing Market Index: +3 to 66.0 in May
- Euro Zone 1Q 2019 GDP (Second Estimate): +1.2% annualized rate
- U.S. Housing Starts: +5.7% to SAAR of 1.24 million units in April
- U.S. Building Permits: +0.6% to SAAR of 1.27 million units in April
- Euro Zone Consumer Price Index: +0.7% in April month-over-month and +1.7% year-over-year
What to Watch For
- Tuesday, 5/21:
- U.S. Existing Home Sales
- Wednesday, 5/22:
- FOMC Minutes
- Japan Purchasing Managers’ Index
- Thursday, 5/23:
- U.S. Purchasing Managers’ Index
- U.S. New Home Sales
- Euro Zone Purchasing Managers’ Index
- Japan Consumer Price Index
- Friday, 5/24:
- U.S. Durable Goods Orders
Statistics on the Current State of the Market – as of May 17, 2019
|S&P 500 Index||-0.7%||-2.8%||15.0%|
|Russell 1000 Index||-0.8%||-2.8%||15.3%|
|Russell 1000 Growth Index||-0.7%||-2.8%||17.9%|
|Russell 1000 Value Index||-0.8%||-2.8%||12.7%|
|Russell 2000 Index||-2.3%||-3.4%||14.4%|
|MSCI World Index||-0.3%||-2.6%||13.7%|
|MSCI EAFE Index||0.2%||-2.4%||10.6%|
|MSCI Emerging Markets Index||-3.5%||-7.6%||3.8%|
|STOXX Europe 600||0.6%||-2.4%||12.2%|
|FTSE 100 Index||2.3%||-0.4%||11.5%|
|CSI 300 Index||-2.2%||-6.7%||21.3%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||0.1%||0.2%||1.4%|
|Citigroup 10-Year Treasury Index||0.6%||1.1%||3.6%|
|Bloomberg Barclays Municipal Bond Index||0.3%||0.9%||4.2%|
|Bloomberg Barclays US Aggregate Bond Index||0.3%||0.6%||3.6%|
|Bloomberg Barclays Global Aggregate Index||-0.1%||0.4%||2.3%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||0.1%||-0.2%||7.1%|
|ICE BofA Merrill Lynch U.S. High Yield Index||-0.1%||-0.6%||8.2%|
|ICE BofA Merrill Lynch Global High Yield Index||-0.2%||-0.7%||7.2%|
|JP Morgan EMBI Global Diversified Index||0.1%||0.0%||7.2%|
|JP Morgan GBI-EM Global Diversified Index||-0.6%||-0.8%||1.9%|
|U.S. Dollar per British Pounds||-2.3%||-2.3%||0.0%|
|U.S. Dollar per Euro||-0.8%||-0.4%||-2.4%|
|U.S. Dollar per Japanese Yen||-0.3%||1.3%||-0.2%|
|Real & Alternative Assets|
|Alerian MLP Index||0.6%||2.7%||18.4%|
|FTSE EPRA/NAREIT North America Index||1.2%||1.6%||17.3%|
|FTSE EPRA/NAREIT Global Index||0.5%||0.3%||14.1%|
|Bloomberg Commodity Index||1.4%||-1.0%||4.9%|
|Gold (NYM $/ozt) Continuous Future||-0.9%||-0.8%||-0.4%|
|Crude Oil (NYM $/bbl) Continuous Future||1.8%||-1.8%||38.2%|
Source: FactSet, Neuberger Berman.