As we prepare for Halloween and the swarms of costumed trick-or-treaters banging down our doors, I thought I’d share a spooky excerpt from the IMF’s latest World Economic Outlook publication: “The global economy is in a synchronized slowdown, with growth for 2019 downgraded again…its slowest pace since the global financial crisis.”
Our Market Insights Webcast features a Q&A session with Massey Quick Simon Chief Investment Officer, Chris Moore and Director of Marketing Darcy O'Brien. Chris will be answering questions about the recent equity rally, corporate earnings, and interest rates.
We have been enjoying what will likely be the longest period of economic expansion ever for the country. Corporate earnings have been resilient, consumer and bank leverage has been contained, and labor productivity has been high while inflation kept low. This has been in no small part due to the Fed putting significant muscle behind the economy to move it forward from the 2008 financial crisis, slashing interest rates from over 5% down to zero and buying Treasuries and mortgage backed securities to provide market liquidity and support. Furthermore, the Trump administration’s more recent deregulation and tax reforms had turbocharged an already strong economy. Thus, the U.S. has been a standout performer versus other developed and emerging economies.
As we entered 2018, equities rallied with vigor in January, however we began to see a wider distribution of returns across markets. The first salvo of a trade war with China was made in February and catalyzed domestic and international equity dispersion, further fueled by a strengthening dollar as investors rightfully viewed the US’ domestic growth, rising rates, and now protectionist measures, as an attractive market to be allocating capital to. We would note that “growth” stocks performed well but the continued rise in rates weighed on slower growing “value” stocks, as they were viewed to be more rate sensitive and subject to inflation. Through all this, investors leaning into domestic high-multiple growth equities and away from more defensive fixed income assets looked like heroes through most of 2018.
After a relaxing summer of benign markets and domestic equity indices setting new highs, volatility came back with a vengeance in October, and with less than a week left in the month, has taken away practically all the gains made so far this year. As of the time of this writing, the S&P 500 is down almost 9% on the month, taking the index negative year-to-date. It’s worth noting is that the leaders for the first three quarters of the year, Tech and Small Caps, are underperforming meaningfully so far in October, with the Nasdaq and Russell 2000 indices down 12% and 13.4%, respectively.
Our Chief Investment Strategist, Stewart Massey reviews asset class performance during the first quarter of 2018 with a focus on energy markets and Master Limited Partnerships.
What a year! A prosperous, boring year. There was plenty of domestic and international news and political uncertainty in 2017, but with the economy on sure footing, global markets held their noses and continued to march higher. In the US, the S&P500 returned 21.8%, with the strongest performance coming in the fourth quarter. Volatility has also remained muted as the VIX was range-bound between 10-12% for most of the year. In fixed income, despite three rate hikes, the 30-year Treasury ended the year lower, and the 10-year bond essentially flat.
At the risk of sounding like a broken record, all major asset classes have remained steadfast in their climb higher through the summer, unfazed by geopolitics, quantitative tightening, and the wrath of Mother Nature. In the current environment of low rates and equity valuations priced to perfection, we recognize that relatively modest weakness in earnings can reverberate across business supply chains, balance sheets, and capital markets suddenly and unexpectedly.
The second quarter continued to march in a similar vein to the first this year with muted volatility and international markets outpacing domestic markets. Highlights in the period include another 25bp increase in rates on Fed Funds, but more notably the Fed’s announcement for plans to reduce its balance sheet, likely to begin later in 2017.
The world has entered a period of greater political instability with the surprise outcomes of Brexit, the US Presidential Election and a number of heated elections across Europe in 2017. Growth prospects across the globe are therefore mixed. Nonetheless, the forecasted global GDP has been revised upward by the IMF to 3.4% for 2017. The drivers behind the revision are fiscal stimulus and policy changes in the US.
The fourth quarter of 2016 was not short on news, primarily focused on the dramatics associated with the US Presidential Election. The world reacted to a surprise win by now President Trump over Hillary Clinton, OPEC made positive progress, and the ECB announced plans to continue their quantitative easing for another nine months.
After a dramatic spike in volatility in the second quarter following news of an unexpected Brexit announcement, markets largely rebounded without major interruption throughout Q3. Nevertheless, macro uncertainty remained high with the familiar refrains of divergent central bank policies, geopolitical tensions, and sluggish global growth continuing to loom large.
Markets saw significant volatility at the conclusion of the first half of the year. An unexpected Brexit was a meaningful driver of downside risk in June. Additionally, persistent global growth concerns, divergent central bank policies, and tragic terrorist attacks both in the US and abroad all continued to weigh on risk assets.
Markets whipsawed between gains and losses throughout the first quarter. Continued global growth concerns, renewed stress in Chinese markets, US political drama and divergent central bank policies all impacted markets in the first three months of 2016.