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AAM Viewpoints – Doves: Birds of a Feather Flock Together


As we enter historic territory for economic expansion, we also are dealing with historic levels of investors seeking the catalyst for the end of this cycle. As such, investors are left to cope with increased anxiety and an increasing barrage of negative headlines. To perpetuate the expansion further, global central banks are once again coordinating their actions, which are worth far more than words for investors.


The futures market has been calculating a 100% chance of a rate cut from the Federal Open Market Committee (FOMC) this week. This follows outgoing ECB (European Central Bank) president Mario Draghi’s announcement that expected strength in the second half of 2019 for the Eurozone was not looking realistic. In his words, “It is getting worse and worse in manufacturing and getting worse and worse in countries where manufacturing is very important.” As such, a “significant degree of monetary stimulus continues to be necessary to ensure that financial conditions remain very favorable to support the Euro area expansion.” China’s recent GDP growth rate was the lowest in 27 years as it came in at 6.2%. This was considering a good 12 months of multiple layers of monetary stimulus across many fronts and fiscal stimulus to boot to offset the uncertainty of the trade tussle with the United States. The Bank of Japan has been in a perpetual quantitative easing (QE) state of mind. The amount of central bank assets on their balance sheet from December 2014 to December 2016 went up nearly 40%, or roughly $6 trillion. All this QE certainly can make one feel “QuEasy,” yet they also supply a large amount of “Dramamoney” to ease the nausea.


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As a byproduct of the liquidity strains of December 2018 and the increasing anxiety of trade tensions, the amount of negative yielding debt globally has shot up. In September 2018 we stood at $5.7 trillion; currently we stand at $13.67 trillion…the highest on record. For those thinking this is just a temporary situation with negative bonds maturing shortly, the largest weighting of the negative yielding index is a maturity of 2028 and the average time to maturity for the entire negative yielding index stands at 5.34 years, according to Bloomberg Barclay Negative Yielding Index. So not only are they willing to “hold” (loose assumption) for this timeframe, but there are bids out there for these bonds. Another byproduct is that there are now 14 European High Yield Corporate names that are at negative rates of return.


Though this is historic, reverting to the norm will take a decade or longer and will be anemic in its unwinding as demographics and the global aging workforce play as much a role as any other dynamic.


Perhaps the best news – and affirms the sentiment numbers from consumers in the United States – is the higher-than-expected consumption numbers. As the chart below shows, the long-term regression trend line showed a slowly declining trend line for U.S. personal consumption since 1983 up until the start of the recession in December 2007. Upon the conclusion of the recession, personal consumption began to climb and with recent prints above 4%. We have had three 4%-or-better prints in the last six quarters which hadn’t happened since 2014.


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To the skeptical investor it reminds them of 2014 when consumption numbers coincided with projected earnings slow down or outright earnings recession…which is what occurred in 2015. One might find this may be the latest “strategic reason” for the camp who have been calling for a bear market. Yet the earnings so far are surprising on the upside as compared to expectations.


The Fed’s pivot, the increased stimulus from other central banks and earnings that are not disappointing as much as expected (so far) should give longer-term investors some positive momentum. The hardest part of investing is buying in the face of increased negativity, and now is no different. Case in point is that European Central Bank’s president’s negative comments on manufacturing occurred within the last 10 years. The last time the Purchasing Managers Index was at its current level, the Euro Stoxx was up 15% over the next 12 months. That should be enough to buy an extra bottle of antacid.


 


CRN: 2019-0715-7552R   



This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.

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