The Macro View by Lionomics, February 2020

We work with Wilshire, one of the nation’s largest investment research consultants, to bring you investment advice and market insights. Each quarter in The Macro View, we summarize Wilshire’s viewpoint on the macroeconomic landscape and the asset classes that may make up the core components of your investment portfolio.

What’s macroeconomics, you ask? It’s the study of large-scale or general economic factors, such as interest rates and national productivity. Let’s dive in!

Global Economy Shows Signs of Stabilizing

Global risk assets (also known as equities or stocks) finished 2019 with strong positive momentum. Read more in our 2019 Lionomics year-end report. Now, two months into 2020, economic data continues to exhibit signs of improvement, particularly with respect to U.S. consumers, as Consumer Sentiment and Retail Sales (measures of consumer confidence) surprised the market by being stronger than expected. 

Globally, economic data has also shown some signs of stability, as growth and inflation in Japan are picking up, economic growth in South Korea outperformed expectations, and German manufacturing showed some signs of a potential bottoming out, which means further decreases there are unlikely. 

Furthermore, improvements in trade negotiations between the U.S. and China, as well as Mexico, helped improve investor sentiment in emerging markets. Lastly, the gradual steepening of global yield curves (a yield curve is a line that plots the interest rates of bonds) throughout Q4 is indicative of improving sentiment and growth.  These improvements signify that there may be less volatility in emerging market securities and are a positive sign for global growth.

Asset class perspectives — MoneyLion portfolios

Wilshire remains diversified across asset classes (stocks and bonds) and geographic regions (U.S. and international) in its portfolios. Wilshire also continues to invest in areas of the market that show relatively attractive valuations, which means they aren’t overpriced and may represent a good value for investors while protecting against volatility and offering higher expected returns.

Below we’ve summarized Wilshire’s Q1 2020 viewpoint on the core components of MoneyLion members’ investment portfolios. 

Fixed income vs. equity

Wilshire believes it’s important to maintain a balanced portfolio for two key reasons: Both equities and fixed income are exhibiting relatively high valuations (i.e., they’re not a bargain; and may even cost more than their worth), and global uncertainty and volatility are on the irse.

Global ex-US vs. US equities

Wilshire is seeing improving economic indicators in foreign markets, and foreign equities are attractive on a relative-valuation basis (meaning that international investments may be undervalued in relation to US investments) and priced with a high degree of pessimism (meaning, the prices aren’t too inflated). The recent technical deterioration in the U.S. dollar also serves as a potential boost for non-U.S. investments, particularly as the U.S. dollar is expensive relative to most other currencies.

Emerging markets vs. developed equities 

Wilshire believes that currencies and equities have largely priced in existing geopolitical risks, meaning that the price of these investments already reflects the risks and is therefore unlikely to be further affected by them, while sentiment and the technical picture has continued to improve. However, Wilshire sees some near-term risk due to the economic impact of the coronavirus. As a result, they are cautious about just how much they favor emerging markets.

Recent Pickup in Global Economic Growth 

The Gross Domestic Product (GDP) growth rate is how much more the economy produced in one year compared to the previous year. While global GDP growth slowed through most of 2019, there were some indications of stability and improvement in economic sentiment during the last four months of the year. 

Most of the developed world is exhibiting GDP growth of 1-2% year over year (YoY), and select markets are witnessing a recent pickup in growth, namely Brazil, Japan, and South Korea (Exhibit A). Many economists place the ideal GDP growth rate at 2%. As seen below, U.S GDP growth exceeded these levels and was relatively stable during 2019, finishing at 2.3% for the year.

Exhibit A: Global GDP Growth (YoY)

Source: Bloomberg

Some Signs of Growth in US Economy

Despite the weakness in the ISM Manufacturing Purchasing Manager Index (PMI), (a measure of the productivity and output of industrial companies, and is data used to determine the strength of the economy) in 2019, the first measure of this survey in 2020 showed a strong pickup and is now signaling expansion, or economic growth,  as shown in Exhibit B. Furthermore, the ISM Non-Manufacturing Index (measures the productivity of companies who earn revneue through providing services) remains in expansionary (growing) territory (above 50), and is now trending higher. Given that the U.S. is largely a services driven economy, the Non-Manufacturing PMI is a more important indicator of growth. 

Furthermore, the recent differences between the Manufacturing and Non-Manufacturing PMIs have been reasonably similar to what we observed in 2015/2016 (a short-lived earnings recession) and in stark contrast to what we observed in previous actual recessions when the Services PMI also collapsed (2000 and 2008). In other words, we do not interpret the latest difference between the PMIs to be an indicator of a potential upcoming recession.

Exhibit B: PMIS – Manufacturing is Worse Than Services, Similar to 2015

Source: Bloomberg

A Few Signs of Concern Remain

There are, however, some remaining signs of concern, as we continue to see significant deterioration in Leading Economic Indicators (Exhibit C), which are key metrics that are used to indicate the direction or health of the economy and financial markets. Fortunately, the average U.S. consumer has been bolstered by strong wage growth, which has outpaced core inflation over the past several years.

For most of 2019, the strength of the U.S. consumer offset the decline in Gross Private Domestic Investment, which has weighed on GDP growth. The first print of Q4 GDP (2.1%) showed that U.S. growth continues to demonstrate modest expansion primarily due to strong Personal Consumption Expenditures, although at a declining rate. This decline in Consumption was offset by Net Exports; however, it is concerning to see this trend is coinciding with continued weakness in business investment, which generally means that companies are spending less which is one of the key drivers of economic activity.

Exhibit C: Leading economic indicators decline

Investor sentiment — businesses still exhibiting uncertainty

Despite the significant recovery in global risk assets and modest improvement in recent economic conditions, the impact of heightened geopolitical risks and political dysfunction in the U.S. continues to have a negative impact on business sentiment. 

Specifically, CEO Confidence in the U.S. has fallen from very high levels (Exhibit D). This deterioration in sentiment has been consistent with the readings in ISM Manufacturing PMI surveys discussed in the economic growth section (Exhibit B). The most recent observations of CEO Confidence indicate an uptick, which may be a function of progress in trade talks; however, Wilshire will need to see this trend continue and would look for improvement in the hard data (business investment) to confirm that the business environment is improving.

Exhibit D: Business Sentiment is Declining, Still at High Levels

Source: Bloomberg

Outlook: What to watch in the months ahead

The economy needs to see an improvement in business sentiment, which requires economic and geopolitical clarity, which is unlikely given that this is an election year. Wilshire will continue to watch CEO Confidence levels, particularly for hard proof like business investment, to confirm that the business environment is truly improving.

The near-term outlook faces heightened uncertainty on concerns that the coronavirus could impact global economic growth. Given that investors continue to invest with a growing degree of calm and complacency (investors have been pretty comfy since volatility collapsed throughout Q4 2019 in both equities and fixed income), there is a growing probability of higher volatility ahead. 

As always, it is good investing behavior to keep a diversified portfolio, which MoneyLion members can maintain by choosing one of seven options based on their risk preferences. Additionally, investing on a recurring basis using Auto Invest allows MoneyLion members to stay consistent through macroeconomic developments without attempting to time the market 

Disclosures

Wilshire Funds Management (“WFM”) is a business unit of Wilshire Associates Incorporated (“Wilshire®”). 

This material contains confidential and proprietary information of WFM. It may not be disclosed, reproduced or redistributed, in whole or in part, to any other person or entity without prior written permission from Wilshire.

This material is intended for informational purposes only and should not be construed as legal, accounting, tax, investment, or other professional advice. Past performance is not indicative of future results. This material may include estimates, projections and other “forward-looking statements.” Due to numerous factors, actual events may differ substantially from those presented. Forward-looking statements speak only as of the date on which they are made and are subject to addition, change or deletion without notice; we undertake no obligation to update or revise any forward-looking statements. 

This material represents the current opinion of Wilshire based on sources believed to be reliable. Wilshire assumes no duty to update any such opinions. Wilshire gives no representations or warranties as to the accuracy of such information, and accepts no responsibility or liability (including for indirect, consequential or incidental damages) for any error, omission or inaccuracy in such information and for results obtained from its use. Information and opinions are as of the date indicated, and are subject to change without notice.

Wilshire is a registered service mark of Wilshire Associates Incorporated, Santa Monica, California. All other trade names, trademarks, and/or service marks are the property of their respective holders. Copyright © 2019 Wilshire Associates Incorporated. All rights reserved. 

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