The inverted yield curve, trade-war uncertainty and global data weakness argue for caution. On the other hand, U.S. Federal Reserve (Fed) easing, China stimulus and a U.S.-China trade deal could trigger another bull run. But it’s late cycle, the downside equity market risks outweigh the upside and betting on a market friendly outcome at mid-year 2019 is risky.
Bond and equity markets are arguing with each other. Bond markets see trade-war escalation, weak global data and declining inflation expectations. Equity markets see Fed easing, China stimulus and a trade deal with China ahead of U.S. President Donald Trump’s 2020 re-election campaign.
The bond market isn’t always right, and the equity market story has some appeal, but there is one heavyweight indicator on the side of the bond market – the inverted yield curve. This has predicted every U.S. recession over the past 50 years. The inversion needs to be sustained for a couple of months to provide a strong signal, but it makes a persuasive case for caution.
Paul Eitelman thinks that the Fed is now on track for one or two precautionary rate cuts. U.S. inflation is below 2% and market inflation expectations are low, which biases the Fed towards taking out some insurance against a downturn. The U.S. equity market is expensive and there is pressure on the cycle, which adds to Paul’s caution.
Europe is struggling to rebound from last year’s growth setbacks, although Andrew Pease expects there will be some improvement. The trade-war dominates, however, and optimism on Europe requires an easing in global trade tensions.
Not surprisingly, the trade-war also dominates the Asia-Pacific outlook. Alex Cousley sees China stimulus and central bank easing across the region. Exports, however, are under pressure. Adding to concerns are that Japan seems likely to proceed with the October hike in the consumption tax rate. On the positive side, equity valuations in Japan and Emerging Asia are slightly cheap, but a positive view on the cycle requires confidence in a trade-war resolution.
Van Luu and Max Stainton think the shift in Fed action towards easing will signal the peak in the U.S. dollar. Emerging market currencies at near-decade lows are likely to be the main beneficiaries of the softer greenback. The Japanese yen stands out as the preferred currency on valuation grounds and because of its safe-haven properties during risk-off episodes.
The recession probabilities from Kara Ng’s U.S. business cycle index model have moved into the warning zone following the yield curve inversion. The model’s recession probabilities have not yet reached pre-2008 levels, but the readings are high enough to reinforce the note of caution that our qualitative assessment is providing at mid-year.
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.
The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.
The information on this website is only intended for use by professional clients, regulated financial advisers and intermediaries who are knowledgeable and experienced in the financial services market and in investment products of this nature. If you are a retail or individual investor then please leave this website immediately and consult your financial adviser.
You should not use this website unless you understand its nature and the extent of your exposure to risk. You should also be satisfied that the website and investments are suitable for your client in light of their circumstances and financial position.
The information contained on this website is for information purposes only and you should not take it as constituting an offer, solicitation, inducement, commitment or invitation to subscribe for or to purchase, sell or hold any interest in any of the investments mentioned herein.
This website is not intended for distribution or use by anyone in any jurisdiction in which such distribution or use would be prohibited. Nothing on this website or in the materials referred to therein constitutes, or is intended to constitute, financial, tax, legal or other advice.
The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested. Any past performance figures are not necessarily a guide to future performance.
The website may contain forward-looking statements, which are based on a number of assumptions regarding present and future business strategies, which may or may not prove to be correct. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance.
Issued by Russell Investments Limited. Company No. 02086230 and Russell Investments Implementation Services Limited Company No. 3049880. Registered in England and Wales with registered office at: Rex House, 10 Regent Street, London SW1Y 4PE. Telephone +44 (0)20 7024 6000. Authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London E20 1JN.
All reasonable care has been taken by us to ensure that the information contained on this website is accurate at the time of publication. However, we accept no responsibility for the accuracy, adequacy or completeness of the information and materials contained on this website and expressly disclaim liability for errors or omissions in such information and materials. We and our respective affiliates do not have any obligation to update the information contained in this website and reserve the right to change these terms and conditions at any time, without notice.
We will not regard you or any person who accesses this website as our client in relation to any of the investment products or services detailed therein, unless expressly agreed.