Synchronized global growth was one of the main themes coming into 2018. In the second quarter GDP in the U.S. was the strongest since 2014, even as growth around the world downshifted. While global growth will be decent in the second half of this year, growth has already slowed in the U.K, Europe, China, and Japan.
This week I have something special for you: an update of “The Distribution of Pain,” one of 2017’s most popular letters. I say “popular” just in terms of feedback and reprint requests. It was thought-provoking but also sobering. I started with the original version, re-edited to clarify a few points, and added some new comments. It is still a timely, important topic.
Last month in Venezuela’s capital city of Caracas, a cup of coffee would have set you back 2 million bolivars. That’s up from only 2,300 bolivars 12 months ago, meaning the price of a cup of joe has jumped nearly 87,000 percent, according to Bloomberg’s Café Con Leche Index. And you thought Starbucks was expensive.
In the title of his quarterly message at the beginning of this year, our outgoing president Sam Stewart referred to a popular rumination of baseball legend Yogi Berra: Seems Like Déjà Vu, All Over Again.
Market returns and economic growth have underlying drivers. At their core, extended periods of extraordinary growth and disappointing collapse reflect large moves in those drivers from one extreme to another. Extrapolation becomes a very bad idea once those extremes are reached.
Recent economic data reports, while mixed, continued to paint a picture of a strengthening economy in 2Q18. This improvement, expected to be seen in the GDP report to be released this Friday, partly reflects a rebound from a “soft” 1Q18. Averaging the two quarters should show a robust pace of growth in the first half of the year.
We answer some of today’s most pressing investor questions—from the effect of trade wars with China to our expectations for rising rates and a correction in high yield.
Anticipate before you participate in the market. This is a classic piece of advice I like to give investors and have written about extensively in my CEO blog, Frank Talk. Financial markets are influenced by relatively predictable cycles and trading patterns, and by better understanding these we are able to react thoughtfully to headline noise or unexpected market developments.
There are a number of changes taking place in the investment environment and they are likely to have an influence on the returns on financial assets for some time to come. When the world’s leading economy, with more than a fifth of global GDP, does not participate in major alliances dealing with matters of security and the environment, this has longer-term investment implications.
I cannot remember a market week with so many significant events. Important economic data and testimony by Fed Chairman Powell would be a big week. But we also have the Trump/Putin meeting, the start of an important earnings season, and the daily soap opera from Washington.
Fed Chairman Jerome Powell will deliver his semi-annual monetary policy testimony to Congress on Tuesday and Wednesday, but he’s not expected to cover any new ground.
A review of last month’s market-moving events across countries and asset classes.
The second quarter was marked with market volatility from geopolitical tensions, the president’s tweets, and “America first” rhetoric.
Given that we are in the later stages of this economic cycle, with factors such as increased trade tensions and geopolitical uncertainty at play, we do expect greater volatility may be ahead. But it’s important to remember that experiencing these ups and downs is a normal aspect of our market environment.
The noise surrounding the stock market is getting louder, resulting in more violent moves in equities. Much of the sound and fury is best ignored by long-term investors, but there are growing risks to the bull market in the form of rising trade disputes and the possibility of a central bank mistake. For now, we believe the secular bull market is intact, but are growing more concerned and urge investors to remain disciplined and diversified.
This week I had the privilege of meeting a young tech superstar in Palo Alto, California—Gabe Leydon, cofounder and now-former CEO of mobile game producer MZ. Previously known as Machine Zone, the Sunnyvale-based company is responsible for developing some of the highest-grossing mobile games of all time, including Game of War: Fire Age and Mobile Strike, both of which profited from high-dollar marketing campaigns worthy of some Hollywood films. You might have seen Game of War’s Super Bowl commercial featuring swimsuit model Kate Upton, or Mobile Strike’s, starring Arnold Schwarzenegger.
Investors appear to remain oblivious to how high inflation already is in the US relative to inflation rates around the world. With Washington DC policy overtly pro-inflation, investors need to be positioned for the overheating ahead.
Italy suffers from a series of major structural problems that, even with the best of intentions, cannot be corrected anytime soon, and the new Italian government is about to find out that it has landed in the deep end of the pool.
We continue with our theme of “it’s getting late” when looking ahead to the second half; with important and rising risks to weigh against the rewards.
Life-cycle economics contributes two foundational concepts to financial planning. The first is that individuals and couples must accumulate savings during their working years to support themselves in retirement. The second is consumption smoothing – clients prefer to maintain a steady standard of living over the full cycle of accumulation and decumulation.
Market twists and turns can cause anxiety but it is several unsustainable trends that pose a greater risk. As a result, it makes sense for long term investors to seriously consider exactly what they are trying to accomplish and what they need to prepare for throughout their investment horizon.
Many forces undercut and bolster the greenback. Rather than accepting unknown risk around its near- or long-term direction, dollar-based equity investors may be better served using currency hedges so they can focus more on the individual merits of overseas securities.
July 2018 will mark the 108th month of the economic recovery, making it the second longest expansion in history. Another 12-months or so and it will be the longest ever. Moreover, the consensus of economists foresees little trouble ahead.
2017 was a great year for the economy and financial markets, and we started 2018 with high hopes for even faster growth and continued market gains. But between the stock market pullback early in the year; the slowdown in economic growth; and the rising political risks in Asia, with North Korea, and in Europe, with Britain and Italy, expectations softened. Perhaps 2017 was the end of the cycle after all.
The economic calendar is loaded. The many reports include several of the most-watched. The data may even generate enough fresh news to break the summer slumber. There is plenty of skepticism about the most recent economic data.
On Wall Street, it's best not to think too hard or to look too closely into the mouths of gift horses. Since making predictions based on actual economic understanding is rare, analysts typically look to provide explanations after the fact. Within the financial services industry, currency traders are perhaps the greatest practitioners of this craft. While they often get the fundamentals completely wrong, it never seems to stop them from offering bizarre theories to explain currency movements.
We’re a little more than a week into the 2018 FIFA World Cup, and so far Russia has surprised experts and fans alike. Expectations were low at best. Because of recent setbacks, including a disastrous performance at the 2016 UEFA European Championship and injuries sustained by key players, the federation ranked a dismal 66th place among Fédération Internationale de Football Association teams—its lowest position ever. The only reason it didn’t have to qualify to compete was because Russia is the host nation. (This is the first time in its 88-year history, by the way, that the World Cup has been held in Eastern Europe.)
This business expansion has gone on for nine years and most investors think we have to be near the end. In baseball parlance you hear talk that we are in the seventh or eighth inning; nobody seems to believe we are in the second or third. Jamie Dimon of J.P. Morgan has said at a conference we’re in the sixth, which got a lot of attention.
Index provider MSCI’s decision to include Saudi Arabia in its emerging-markets index will likely transform the Kingdom’s equity market, and potentially those across the Middle East and North Africa (MENA) region, according to Bassel Khatoun and Salah Shamma, Franklin Templeton Emerging Markets Equity.
The economic calendar is modest. Volatility is lower even with plenty of news. The summer doldrums have arrived! It provides time for introspection to fill those empty timeslots and pages.
Traditional index funds match market performance and have negligible trading costs with low tracking error—or do they? Not actually—they routinely buy after high price appreciation and sell after high price depreciation. They also have significant trading costs from adding and deleting stocks. We show how index providers can construct better-performing indices that are less prone to performance chasing and have lower turnover.
The U.S. inflation story made further inroads this month, with year-over-year price growth for consumers and producers alike hitting multiyear highs. U.S. consumer prices expanded at their strongest pace in more than six years, climbing to an annual change of 2.8 percent in May. Prices for final demand goods, meanwhile, grew 3.1 percent, their strongest annual surge since December 2011.
Fears of new threats to emerging markets have cooled stock returns after two years of hot performance. But the concerns may be overstated. The long-term risk profile of emerging markets is continuing to improve.
The federal deficit and the cost to service that debt are rising at the same time. This historical anomaly is putting the U.S. on a “suicide mission,” according to Jeffrey Gundlach.
The economic calendar is loaded and there is plenty of non-economic news as well. The punditry will focus on the Trump-Kim summit at the start of the week and then turn to inflation data and the Fed. Who knows what the first might bring, but the market is unlikely to be surprised by the Fed.
If you live in Texas and have any extra gold bars, coins and/or jewelry lying around that need safekeeping, you’re in luck. The Texas Bullion Depository, the first of its kind in the U.S., officially opened to the public in Austin this week, putting a cap on three years of planning and construction. The private firm managing the facility, Lone Star Tangible Assets, calls it the “world’s most advanced depository.”
Market updates from across the region.
While factor-based, style investing in equities has become popular, its adoption has been much slower in other asset classes, including fixed income. New research shows that style investing can also be applied to bonds.
The Federal Reserve has two primary mandates: maximizing employment and stable prices. Congress also included moderating long-term interest rates as part of the Fed’s overall objective, but that should be the offshoot of stable prices. In May the unemployment rate fell to 3.8% which is the lowest since April 2000.
A surprising new report from a respected independent research group in Switzerland concluded that the United States has regained its position as the #1 nation in its global competitiveness ranking. This accomplishment was not expected and has not been widely reported in the mainstream media – no surprise there.
Things just got interesting – maybe. It is hard to write anything definitive given how quickly events are unfolding. Investors were taking turns being spooked by possible trade wars, cancelled (but now rescheduled) Korean denuclearization summits, and elevating unrest in the Middle East. The US market continues its volatile tug-of-war between heavy fiscal stimulus and tightening monetary policy.
The economic calendar is light. Most of the “financial” news flow relates to non-core stories. Of the various geo-political themes, there is one that is most significant for investors.
Prices will rise—for producers and consumers alike—which is good for gold but a headwind for continued economic growth.
Blackstone is pleased to offer the following Market Commentary by Byron Wien which shares his thinking on global economic developments, market insights and other factors that may influence investment opportunities and strategies.
This shouldn’t surprise anyone, but public trust in the federal government is eroding. Sixty years ago, 75 percent of Americans expressed faith in the government to do the right thing “most of the time” or “just about always.” Seventy-five percent! You can’t get 75 percent of people to agree on anything now, as the recent “Laurel or Yanny” video proved.
John Williams, one of the newest members of the Federal Open Market Committee, wrote an article titled “The Future Fortunes of R-star: Are They Really Rising?” where he summarized his views on real neutral interest rates.
Carl Kaufman is the co-president, co-chief executive officer and managing director, fixed income at Osterweis Capital Management. He is the lead portfolio manager for the Strategic Income Fund. That fund has had an annualized return of 6.18% since its inception on 8/30/02. Its performance exceeded the AGG by 278 basis points. I interviewed Carl last week.
In this issue, the Economics team looks at current recession risks in the U.S. and eurozone, and explores how rising oil prices will affect U.S. consumers.
This week I had the pleasure to attend Consensus 2018 in New York, the premiere gathering for the who’s who in blockchain, bitcoin and cryptocurrencies. Attendance doubled from last year to an estimated 8,500 people, all of them packed in a Hilton built for only 3,000. Ticket sales alone pulled in a whopping $17 million, while event booths—the largest of which belonged to Microsoft and IBM—generated untold millions more.
Market signals have been decidedly mixed thus far into the year. By this time a year ago, the S&P 500 had already returned 5%. Today, in early May, the S&P 500 is down fractionally, while volatility and bond yields are up.
