Investment review and outlook
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 stocks stayed flat in Q3
Global equity prices stayed pretty flat during the third quarter of 2019, as geopolitical risk and lessening expectations for global economic growth led to heightened market volatility.
Global central banks (such as the Fed here in the US, and its equivalents in the EU, Japan, and other countries) took action to support financial markets and communicated a willingness to provide stimulus to the economy (such as by lowering rates) as needed.
This dovish sentiment fueled a rally in government bond prices and a significant decline in global bond yields (interest rates). A “dovish” tone refers to accommodative policies such as lowering interest rates to spur economic growth. The opposite is a “hawkish” tone, whereby banks generally raise rates and implement restrictive policies. And a “rally” is a period of sustained increases in the prices of stocks, bonds, or indexes.
While the lower bond yields may contribute to the attractiveness of equities (in other words, investors would receive less interest from bonds, so they could become less attractive investments compared to equities) on a global basis, the bond and equity markets are continuing to send contrasting signals.
Bonds prices are reflecting much slower growth and inflation, and equity prices are reflecting complacency (meaning that investors aren’t worried even when perhaps they should be!), as indicated by low levels of implied volatility.
Wilshire continues to believe that the bond market is somewhat too dovish and that the optimism in equity markets hinges on this same dovishness. Don’t forget about the hawks, people.
Asset class perspectives — proceeding cautiously
Below we’ve summarized Wilshire’s Q4 2019 viewpoint on the core components of MoneyLion members’ investment portfolios.
Fixed income vs. equity
Given that both equities and fixed income exhibit relatively high valuations, Wilshire believes it’s important to maintain a balanced stock and bond portfolio given heightened volatility and global economic uncertainty.
Global ex-US vs. US equities
While Wilshire continues to see slowing economic growth in foreign economies relative to the U.S., foreign equities are still attractive on a relative-valuation basis and are also priced with a high degree of pessimism (meaning, the prices aren’t too inflated) making them an important component of a balanced portfolio.
Emerging markets vs. developed equities
Wilshire believes that emerging market 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); however, they recognize that valuations are less compelling on a relative basis due to lower expectations of forward earnings growth. As a result, they are cautious about just how much they favor emerging markets.
Economic growth starting to slow
Wilshire has seen significant deterioration in Leading Economic Indicators (LEIs) due to weaker sentiment in manufacturing and consumer expectations, as shown in Exhibit A. Leading economic indicators are statistics that precede economic events. They predict the next phase of the business cycle.
Exhibit A: Leading Economic Indicators
The green and red bars represent US LEIs month over month, where green represents positive consumer and manufacturer sentiment, which could be a sign for growth, and red represents negative sentiment, a possible signal that economic growth may be slowing.
During the second half of 2019, the bars turn from green to red, which reflects the weaker or negative sentiment among consumers and manufacturers. This could signify that the growth that the market and economy have experienced may be slowing in the coming months or year.
While U.S. growth continues to outpace major foreign developed economies, economic growth has been slowing in general on a global basis (Exhibit B).
Exhibit B: Developed Markets Real GDP Growth
While the dark blue line (the US growth rate represented by GDP) may be greater than the economic growth of the other regions represented, the US growth percentage still has been declining along with the growth rates of the other regions (as indicated by all lines moving down together) over the course of 2018 and 2019 to date.
While there are signs of stabilization in some major developed market economies such as the U.S. and Japan, the U.K. and Europe both face cyclical and structural risks to economic growth due to geopolitical uncertainty (oh, Brexit…) and the challenges associated with implementing a unified monetary policy across misaligned economies, respectively.
Investor sentiment — businesses still exhibiting uncertainty
Despite the significant recovery in global risk assets, the impact of heightened geopolitical risks, political dysfunction in the U.S., and slowing global economic growth have continued to negatively impact sentiment. Specifically, CEO confidence in the U.S. has fallen from very high levels (Exhibit C).
The chart below plots the CEO Confidence Index since 2003. This index is based on a quarterly survey of approximately 100 CEOs in various industries. It reflects chief executives’ attitudes and expectations regarding the overall state of the economy as well as their own industry. As you can see in the chart, CEO confidence has been in a fairly steady decline over the last year but is still at a relatively high levels which is cause for Wilshire to continue to have a cautious outlook on the market.
Exhibit C: Business Sentiment is Declining, Still at High Levels
Outlook: What to watch in the months ahead
There are no major changes in Wilshire’s views since the August Macro View. Wilshire remains overweight to foreign equities and emerging markets, which means they believe that it’s important for portfolios to include an allocation to these regions as a balance to US equities.
Based on the most recent GDP data, the U.S. consumer remains healthy, but business sentiment continues to weigh on the corporate sector which is a large contributor to any potential growth in the markets. This continues to serve as an indication that the economy is not that bad, but it is gradually becoming apparent that the earnings outlook may not be that good.
Future monetary stimulus remains questionable, and without central bank easing, equities will need stronger earnings growth to support current valuations and future price appreciation.
Unfortunately, this increases the probability of higher volatility ahead for both equities and fixed income. Therefore, Wilshire remains balanced and diversified in their asset allocation positioning overall.
As always, the best course of action typically is to stay diversified and invested for the long term to take advantage of the highs and cushion against the lows.
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