Stocks moved back near their peak this week, as the US backed down on their tariff threats as mounting economic concerns pushed them back to the negotiating table. The data flow for the last several weeks continued to show ongoing weakness in the US and abroad, as increasing barriers to trade and a drop in business investment clouded the outlook. In response to the gloom, global central banks have embarked on another round of stimulus, pushing the limits on the effectiveness of their ability to respond to future crises. From Denmark to Turkey to China, rates have been cut in an effort to turnaround the slowdown, with the European Central Bank leading the way with the announcement of further stimulus through new rounds of quantitative easing and deeper negative rates. Expecting to bring the synchronicity full circle, the Federal Reserve will almost certainly act in the coming weeks to solidify their plan for a mid-cycle “adjustment” to rates by reducing short term borrowing costs further.
Central banks will be put to the test over the coming years, as global growth looks set to continue with ongoing malaise seen for much of this cycle. The headwinds facing the developed world are looking to accelerate, as the population ages dramatically, productivity remains low, and governments are stuck in gridlock, unable to make the structural changes necessary to unlock economic growth. With this in mind, interest rates are likely to stay low for a very long time looking forward, though an increase from current levels seems likely, in our view. The trade war only adds to these problems, and the likelihood of a meaningful trade deal ending the longer-term confrontation with the Chinese is improbably. Given the rise of protectionism, a slower-growing world could be here to stay.
The good news is that despite the increasing frictions across the borders, technology continues to revolutionize consumption patterns, increase efficiencies, and solve many of the world’s problems. One threat that has been notably absent for much of the past 20 years has been inflation, with companies now able to source goods from around the world at lower and lower costs, and their adaptability allowing for the profit engine to keep humming along. Despite a small uptick in inflation this year, expectations remain for slow growth in prices across the globe, further anchoring bond yields lower. This phenomenon is also due to a savvier consumer, who can now with the phone in their hand compare prices across multiple sellers in minutes.
We have recently raised cash to have on hand to be opportunistic should an unwind in the trade talks occur, a surprise disappointment by the Fed, or a geopolitical shock knock equity prices from their highs. US stocks continue to be on the pricey side, but our longer-term view remains that the “goldilocks” scenario of low growth, low inflation, low unemployment is likely to remain as it has for the last decade. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.
Boris Johnson forces to seek a deal in Brexit after being rejected in Parliament.
Small business optimism falls to the lowest in five months on trade concerns.
Producer price index in China continues to fall this month, a strong forward looking indicator that the slowdown is far from over there.
Core inflation picks up, putting the Fed in a quandry.
US inflation picks up, with a record surge in healthcare costs and upcoming tariffs likely to push costs even higher. With the Fed set to cut rates, the threat of inflation may cap their ability to boost the economy with stimulus.
ECB pushes stimulus further, lowering rates deeper into negative territory and repurchasing bonds at a rate of $20bln per month. Bonds rallied, credit spreads tightened. Still looking to generate meaningful inflation and prevent recession.