Global Deceleration and Trade
The International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) both regularly publish widely followed economic forecasts for global and country-specific economic growth. Both of their forecasts have been downgrading the expected rate of global economic growth for some time and this fall is no different.
They both point toward heightened political risks and trade tensions around the world. We are already seeing evidence of a slow-down in the economic data for manufacturing around the world. The United States, China, and Germany are three primary examples.
Manufacturing in both China and Germany represent a significant portion of their respective economies, while in the United States the Consumer is the primary driver of economic activity. Even though U.S. manufacturing is slowing down to recessionary levels that does not mean our economy is headed for recession in the near future. For quite some time, it’s been primarily about the consumer in the U.S.
Source: BEA, Factset, and J.P. Morgan Asset Management.
The most recent report for U.S. GDP pointed to a healthy consumer complimented by rising government spending. Therefore, the market and the Fed are looking to the U.S. consumer to be the primary driver for the continuation of the current economic expansion in the U.S.
Watching and Waiting along with the Fed
As we noted in our summer market perspective, the Fed had just began what is now characterized as a “mid-cycle adjustment” in monetary policy.
All that means is the economy looked to be slowing down, but the underlying fundamentals still appeared strong. With interest rate cuts in July, September and October the Federal Reserve has eased financial conditions pre-emptively to help the consumer.
For now, monetary policy is in line with what the market expects. Therefore, the market’s focus is primarily on the consumer.
Current data suggest the consumer is healthy. Consumer confidence is at high levels, the unemployment rate remains near historic lows, and household debt as a percentage of disposable income also remains at multi-decade lows.
Source: Federal Reserve Bank of St. Louis and the Board of Governors of the Federal Reserve System (US)
The first indication that the consumer will slow spending typically comes from confidence levels. Therefore, we will wait along with market watchers, economists and Federal reserve officials for some signs that the environment is changing.
In the meantime, those who care to watch will also be considering the future course of Brexit, the ongoing protests in Hong Kong and Chile and the latest headlines on U.S. trade policy with all our major trading partners. We can also see rising geopolitical tensions in regards to the events surrounding Syria, attacks on Saudi oil infrastructure, and the commandeering of oil tankers in the Persian Gulf to name a few recent headlines.
Negative Interest Rates?
In August, there was a lot of press focusing on negative interest rates and what they mean for the economy. As investors, we are clear that this development is not a positive indication for the state of international monetary policy or bond investing. Interest rates have been pinned at historically low levels since the Great Financial Crisis and there is no sign that this will change any time soon.
What this means for bond investors is that that the income return from bonds is significantly lower than what it was for many decades. Positive returns will be reliant on continuing falling rates and capital appreciation in bond prices.
This new normal for interest rates and bond investing underscores the importance of doing extensive research into investments beyond traditional stocks and bonds and increases the need for alternative sources for investment returns.
For more than a decade, Cornerstone Advisory has researched and allocated to many alternative investment strategies. Our thorough due diligence process and ongoing work in this evolving part of the investment landscape leaves us well prepared for the current environment as well as the future.
As always, if you have any questions or would like to have a conversation, please reach out to us or your portfolio manager.
The Cornerstone Team
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