FAQs on the Markets and Economy
What is the outlook for the global economy?
Amid elevated geopolitical uncertainty and signs that higher tariffs are weighing on international trade, global momentum has continued to weaken.
For the fourth time in the last year, the IMF has cut its forecast for global growth in 2019. The world economy is now expected to expand at just 3.0% — the lowest rate since the financial crisis — before picking up to 3.4% in 2020.
However, the projected pick-up in growth next year is precarious, relying on authorities reaching an agreement over Brexit, as well as progress in resolving U.S.-China trade differences and other policy issues.
Much of this can be attributed to weakened conditions in many advanced economies, particularly in Europe, where higher exposures to international trade are weighing on already poor growth prospects.
In contrast, the U.S. is one of a handful of economies with a rosier outlook for 2020 than when the IMF last compiled its forecasts in July.
Our portfolio positioning, with a material underweight to European equities and other developed markets outside the U.S., reflects this reality.
Will the Fed lower interest rates again this year?
It doesn’t look like the Fed will cut rates at the final meeting in December. They are signaling a breather.
The Fed cut the federal funds rate three times in three consecutive meetings, lowering the rate by a cumulative 75 bps to 1.625%.
The Fed likens these three cuts to taking out insurance. Although the economy is in good shape (unemployment rate at 50-year lows, inflation is moderate, stocks near record highs, etc.), the Fed is trying to insulate it from the slowdown in business investment and the global economic slowdown brought on by the trade war.
The Fed has been clear in stating this is not the beginning of a sustained easing cycle. Instead, this is a mini-easing cycle. Back in the 1990s on two separate occasions, the Fed eased 75 bps, both of which were credited with prolonging that period of economic growth.
Is the federal government going to get the federal debt under control?
It doesn’t look like the deficit will shrink in the near term. In fact, the deficit has been growing for the past four years and is expected to widen over the next few years.
The federal government’s fiscal year just ended on September 30, and the deficit was $984 billion. If it were not for the newly enacted tariffs, which brought in $70 billion, the deficit would have been over $1 trillion.
This is an increase of 26% from last year and places the deficit at the largest level in seven years.
It is unusual for a deficit to grow in a peacetime economic expansion (chart) because expenditure for social programs, like unemployment insurance, decreases and tax revenues often grow.
Congress has lost focus on the deficit. They have nearly abandoned measures enacted in 2011 that help reduce the deficit by 50%.
Massive tax cuts have been put in place and spending has increased.
What did we learn from the GDP report?
The economy grew solidly in Q3, increasing 1.9%, just slightly under Q2’s 2.0%. The year-over-year change in GDP stands at 1.9%, below the expansion average of 2.3%.
Consumer spending, which accounts for more than two-thirds of GDP, grew 2.9%, about the same pace as the first half of this year.
The resolute consumer along with government spending, exports and residential investment were all positive contributors to growth. For residential investment (housing), it was in the positive category for the first time since the end of 2017. It seems to have received a boost from lower interest rates.
All those strengths more than offset declines in business investment ,which fell 3.0%, after declining 1.0% in Q2. This decline is due heavily to trade tensions, cheaper oil and design problems at Boeing.
All this data demonstrates the sturdiness of the economy, especially the domestic facing portion. But the pace of growth has moderated to a level slightly below the expansion average.
Does earnings season change our view on stocks?
Earnings season does not change our view on stocks. We remain neutral in stocks overall as part of our late-cycle play book. Results from companies confirmed our view that the economy is slowing but still growing.
While headline results have been better than feared, consensus estimates for this year and next continue to decline.
EPS season is also a tale of two cities. Positive results have been produced by consumer-focused areas such as housing, tech purchases that are strategically important and health care equipment and services. Negative results are evident in companies exposed to global trade, high-ticket capital goods and energy related.
Although recent optimism on trade tensions and Fed policy have eased investor concerns about an imminent recession, we remain watchful on risks from the macro environment.
We believe the bull market will continue but that stock prices ahead will move up more in line with modest earnings growth. Our focus remains on quality companies with earning visibility and dividend growth, especially those in the U.S. and EM Asia.