Bank of America Merrill Lynch put out its regular survey of global asset managers last Tuesday. It showed that some of the views adopted by our own Asset Allocation Committee are widely shared.
The AAC took an overweight view on cash for the first time in this cycle. The surveyed managers also increased their cash allocations. The AAC downgraded its view on global equity, expressing a preference for the relative haven of the U.S. The surveyed managers also reported a heavy overweight in U.S. equities.
Other indicators of both long-only and hedge fund positioning tell a story of caution. As a recent rush into money market funds attests, investors seem to be sitting on the sidelines, searching for clarity about what lies ahead.
Growth Is Slowing, Risk Has Increased
They have legitimate reasons.
The global economy appears to be adjusting from a period of higher growth back to something more like post-crisis trend-line growth. As it prepared for its annual meetings in Washington over the weekend, the International Monetary Fund cut its global growth estimate for 2019 to just 3%, the slowest rate since the financial crisis. Moreover, downside risk is increasing. Manufacturers, in particular, are clearly struggling with the fallout from the U.S.-China trade dispute.
Against that background, equity markets have taken a very bumpy ride to get back to roughly the same place they were 12 months ago.
Third-quarter earnings season got underway last week. Will that provide some clarity about what’s coming next? Unlikely. Expect reports to be mixed and year-over-year earnings growth to be flat overall, with poor results from technology companies weighing against better news from the utility and health care sectors.
CEOs and CFOs probably won’t help, either, as guidance is likely to be hesitant and hedged. They face the same uncertainties as investors, after all. “Soft” data such as business and consumer confidence indices have been gloomy lately, reflecting this caution.
Despite Sentiment, Hard Data Shows Signs of Life
And yet the majority of the “hard” data—what businesses and consumers are actually doing, rather than how they say they feel—shows a more resilient picture.
U.S. consumer spending, credit growth and housing demand are holding up. U.S. Purchasing Managers’ Indices appear to be stabilizing. Even in Germany and the rest of the euro zone, recent industrial production and retail sales numbers are showing improvement. Central banks remain very accommodative. And while it is way too soon to draw conclusions, recent days seem to have brought progress in U.S.-China trade and Brexit talks.
The IMF may be calling for 3% global growth this year, but it also said it expects things to get better, not worse, in 2020.
Is It Safe to Get Back in the Game?
It seems that consumers and businesses are more worried about what might happen rather than what is actually happening. It is worth remembering that sentiment, the bulk of what is often referred to as “soft” data, can be a volatile indicator.
Investor surveys reveal a big appetite for technology and other large-cap growth stocks, listed real estate, investment grade bonds and even Treasuries, but we find many of these assets relatively expensive and potentially at risk from a turn in sentiment. While our Asset Allocation Committee upgraded its view on U.S. equities relative to the rest of the world, in doing so, it favored small caps and more economically sensitive sectors.
The downside risks are real and need to be respected—especially as the U.S. heads into an election year. Should we see a stabilization in manufacturing and further progress on trade, however, some of the money sitting on the sidelines could be coaxed back into the game.
In Case You Missed It
- U.S. Retail Sales: -0.3% in September
- NAHB Housing Market Index: +3 to 71 in October
- U.S. Housing Starts: -9.4% to SAAR of 1.27 million units in September
- U.S. Building Permits: -2.7% to SAAR of 1.39 million units in September
- Japan Consumer Price Index: +0.3% in September year-over-year (excluding food and energy increased 0.5% year-over-year)
- China 3Q 2019 GDP: +6.0% annualized rate
What to Watch For
- Tuesday, October 22:
- U.S. Existing Home Sales
- Wednesday, October 23:
- Japan Purchasing Managers’ Index
- Thursday, October 24:
- Euro Zone Purchasing Managers’ Index
- U.S. Purchasing Managers’ Index
- U.S. New Home Sales
- European Central Bank Policy Meeting
Statistics on the Current State of the Market – as of October 18, 2019
|S&P 500 Index||0.6%||0.4%||21.0%|
|Russell 1000 Index||0.5%||0.4%||21.0%|
|Russell 1000 Growth Index||0.3%||0.9%||24.4%|
|Russell 1000 Value Index||0.7%||-0.2%||17.6%|
|Russell 2000 Index||1.6%||0.8%||15.1%|
|MSCI World Index||0.7%||0.8%||19.1%|
|MSCI EAFE Index||1.2%||1.7%||15.3%|
|MSCI Emerging Markets Index||1.3%||2.4%||8.8%|
|STOXX Europe 600||1.0%||1.9%||16.2%|
|FTSE 100 Index||-1.3%||-3.2%||10.6%|
|CSI 300 Index||-1.1%||1.4%||31.4%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||0.1%||0.2%||3.2%|
|Citigroup 10-Year Treasury Index||0.1%||-0.6%||10.2%|
|Bloomberg Barclays Municipal Bond Index||-0.2%||0.1%||6.8%|
|Bloomberg Barclays US Aggregate Bond Index||0.1%||-0.2%||8.3%|
|Bloomberg Barclays Global Aggregate Index||0.3%||0.2%||6.6%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||0.4%||-0.4%||7.8%|
|ICE BofAML U.S. High Yield Index||0.4%||0.2%||11.8%|
|ICE BofAML Global High Yield Index||0.5%||0.8%||10.8%|
|JP Morgan EMBI Global Diversified Index||0.2%||0.2%||13.2%|
|JP Morgan GBI-EM Global Diversified Index||0.6%||2.3%||10.3%|
|U.S. Dollar per British Pounds||1.7%||4.7%||1.3%|
|U.S. Dollar per Euro||0.9%||2.2%||-2.6%|
|U.S. Dollar per Japanese Yen||0.1%||-0.4%||1.1%|
|Real & Alternative Assets|
|Alerian MLP Index||-0.7%||-4.7%||5.9%|
|FTSE EPRA/NAREIT North America Index||1.2%||1.1%||27.0%|
|FTSE EPRA/NAREIT Global Index||1.5%||2.3%||22.1%|
|Bloomberg Commodity Index||-0.2%||1.2%||4.4%|
|Gold (NYM $/ozt) Continuous Future||0.4%||1.4%||16.6%|
|Crude Oil WTI (NYM $/bbl) Continuous Future||-1.7%||-0.5%||18.4%|
Source: FactSet, Neuberger Berman.