Podcast Summary
Real estate manager's perspective on 2019 market events: The Federal Reserve's actions, trade issues, and domestic politics are key events to watch in 2019, but markets may continue to focus on economic fundamentals despite political intrigue.
Principal Asset Management, as a real estate manager, utilizes a 360-degree perspective to deliver local insights and global expertise across various investment types. Looking ahead to 2019, there are several significant events and issues to watch in the financial markets. The Federal Reserve's actions, including potential interest rate hikes, will continue to impact markets. The trade story, which many hope will resolve itself with the new year, remains uncertain. Additionally, domestic political issues, such as potential targeted attacks on the president, could become more prominent and impact markets. The past year and a half of the Trump presidency has seen political chaos at the White House, but surprisingly, it has not significantly affected markets. This trend may continue in 2019, as markets may continue to focus on economic fundamentals despite political intrigue. It's important to remember that investing involves risk, including possible loss of principal. For more information, visit principalam.com.
Political risk at the White House is heightening: Investors should monitor political risk's impact on US equities, trade-sensitive sectors, US dollar, and the Fed in 2019
Political risk at the White House is becoming a more significant factor in the markets, adding to the vulnerability that already exists. This was hinted at during the discussion, as the speakers recalled how market reactions to political events in the past, such as Gary Cohn's potential departure from the White House, have had more pronounced effects recently. They suggested that sectors or indices that are sensitive to trade or the Fed could be used to isolate political risk. Looking ahead to 2019, it is expected that any negative trade headlines will have a greater impact on US equities than on emerging market equities, as emerging markets have already priced in a significant amount of pain. Additionally, the US dollar and the Fed are also areas to watch in the coming year. Overall, the market's reaction to political risk is becoming more pronounced, and it is important for investors to be aware of this and consider how it may impact their portfolios.
US dollar's strength may weaken, causing contraction of multiples but strong earnings growth keeps US ahead: The US dollar's potential weakening and slower Fed rate hikes may cause multiples to contract, but strong earnings growth keeps the US market ahead despite economic deceleration. However, uncertainty remains about how far multiples can contract without a recession and the potential return of interest rate volatility.
The US dollar's strength may weaken further in 2019 due to the Federal Reserve's slower pace of rate hikes and the US economy decelerating more than other economies. This has led to a contraction of multiples in both the S&P 500 and the MSCI Emerging Market Index, but the US's strong earnings growth has kept its performance ahead. The consensus forecast for US earnings growth over the next 12 months is high, and even if it's assumed to be zero, the market still offers an attractive earnings yield compared to inflation and bond yields. However, the question remains as to how much further multiples can contract without an economic downturn, and if the US will experience a recession in 2020. Another developing theme for 2019 is the potential return of interest rate volatility, as seen before the February volatility explosion and after Jerome Powell's comments about being "a long way from neutral."
Fed's Uncertainty Leads to Increased Short-Term Rate Volatility: The Fed's communication strategy change and elevated short-term swaption volatility indicate an inflection point for interest rates, potentially adding volatility to short-term rates but not overall due to strong anchoring to forward guidance.
Uncertainty and confusion about the Federal Reserve's path could lead to increased rate volatility, particularly at the short end of the curve. This uncertainty is reflected in the elevated ratio of 1 year, 2 year swaption volatility to 1 year, 10 year swaption volatility, a ratio not seen since the taper tantrum. This ratio is an indicator of the market's expectations for future interest rate movements, and its current level suggests that investors are pricing in an inflection point for Federal Reserve policy. The upcoming change in the Fed's communication strategy, with every decision now being accompanied by a press conference, may add some volatility to short-term rates. However, the market's strong anchoring to the Fed's explicit forward guidance may continue to limit rate volatility overall. As a leading real estate manager, Principal Asset Management uses a 360 degree perspective to uncover opportunities in today's market, giving clients an exclusive advantage. (193 words)
The use of forward guidance by central banks for decreased volatility: Central banks' use of forward guidance has led to lower financial market and macroeconomic volatility, but it could also breed a false sense of certainty and potential severe economic downturns.
The use of forward guidance by central banks, such as the Federal Reserve, has led to decreased financial market and macroeconomic volatility over the past quarter century. This trend has been observed through the release of more explicit statements and the lengthening of lead times in money market curves. However, this reduction in volatility may come with risks, as it could breed a false sense of certainty and potentially lead to more severe and abrupt economic downturns, such as the Great Recession. Looking ahead to 2019, concerns about a severe downturn in the credit market exist, but some corporates are taking steps to improve their balance sheets. The debate continues on whether credit or equity will outperform next year. While the benefits of forward guidance, such as reduced volatility, may seem appealing, it's important to consider the potential risks and uncertainty it may bring. A return to less explicit communication from central banks could help mitigate these risks, but it remains to be seen whether this is a viable solution.
Markets' Role in Economic Landscape: The speaker believes that markets will determine the extent of trade tensions and the credit cycle's progression, shaping the economic landscape in the coming year.
From a relative value perspective, the speaker prefers equities over credit at the current market valuation due to the gradual nature of the credit cycle and the expectation that spreads will widen over the remainder of the cycle. Additionally, the speaker believes that financial markets have signaled that President Trump has gone far enough with trade tariffs for now, and that keeping the issue alive as a winning issue for him without causing significant negative repercussions is a strategy that other foreign leaders may be willing to play along with. However, the speaker expresses uncertainty about this. The speaker also mentions the uncertainty surrounding the trade truce and the potential for a trade war, and believes that the markets will be the determining factor in how far Trump pushes the issue. Overall, the speaker's perspective is that the markets will play a key role in shaping the economic landscape in the coming year.
Political changes in D.C. could give foreign governments more leverage against Trump: Unpredictable political climate in D.C. could cause market volatility with upcoming debt ceiling debate and potential for hard Brexit
The political landscape in Washington D.C. is undergoing significant changes, which could potentially give foreign governments more leverage against President Trump. The upcoming debt ceiling debate in 2019 is expected to be a major point of contention between the White House and Congress, but the impact on the markets is uncertain. Previous government squabbles have often been resolved, but the rules of engagement have changed, making it difficult to predict the outcome. The potential for a hard Brexit was also mentioned as a significant event to watch out for. Overall, the political climate is unpredictable, and while these events may not have a lasting impact on the market, they could still cause significant volatility in the short term.
Skepticism about the rotation from growth to value stocks: Despite potential for shift, hosts express doubts about long-awaited rotation from growth to value stocks. New podcast, Money Stuff, featuring Matt Levine and Katie Greifelt announced.
Learning from this episode of the Odd Lots podcast is that the hosts, Joe Weisenthal and Tracy Alloway, expressed their skepticism about the long-awaited rotation from growth to value stocks in the market. They welcomed Luke Kawa and Cameron Kreis as guests for a look back at the past year and a look ahead to 2019. While they acknowledged the potential for this shift, they expressed their doubts, encouraging listeners to stay tuned as they monitor the situation. Additionally, the hosts announced a new podcast, Money Stuff, featuring Matt Levine and Katie Greifelt. This podcast will bring the popular Money Stuff newsletter to life, with new episodes every Friday. Listeners can tune in on Apple Podcasts, Spotify, or wherever they get their podcasts. The Odd Lots podcast team includes Joe Weisenthal (@thestalwart), Tracy Alloway (@tracyalloway), Luke Kawa (@ljikawa), Cameron Kreis (@5thrule), Topher Forjes (@forges_t), Liz Smith (@lizthesmith), and Francesca Levy (@francesca_today). Follow them on Twitter for more insights and updates. The Odd Lots podcast will continue to provide in-depth analysis and discussions on finance and markets throughout 2019. Stay tuned!
