(New York)

Those worried about rate hikes will be happy to hear this news. Ever-hawkish Jerome Powell is finally starting to sound just a bit more dovish. Powell says the economy is strong, but could face “headwinds”. He says the Fed is discussing how much and how fast to raise rates and acknowledged that the Fed’s actions could inhibit the economy. He said the Fed’s goal is to “extend the recovery, expansion, and to keep unemployment low, to keep inflation low”.

FINSUM: It is good to hear some public consideration that rates might get in the way of the economy. While we would not exactly say this is dovish, it is certainly less aggressive than previously.

(London)

Just a couple of days ago it seemed like the UK and EU were on the verge of coming to an agreement over Brexit. Now, just 48 hour later, a deal actually seems further away than it ever has. Reviewing UK headlines, the irony of PM May’s proposed deal is that it did what no one else has been able to—unite Britain. However, the unity is driven by shared hatred from all sides over what a terrible agreement the government has proposed. Numerous government ministers have resigned on the back of the proposal.

FINSUM: The pushback to this deal has been more than anyone would have anticipated. A no-deal Brexit looks increasingly likely.

(New York)

With all the volatility of the last month, and midterms, less focus has been on one of the most ominous of economic signs—the yield curve. Well, Goldman Sachs has just weighed in, warning investors that a yield curve inversion is looming. Goldman went further than to say that 2-years might be flat or overtake 10-years, the bank said that spreads between 2- and 30-year bonds would fall to zero. To put that call into perspective, it would be a narrowing of 50 basis points versus now. Goldman highlighted the move in its top themes to watch for 2019.

FINSUM: We have to give Goldman Sachs a little credit here as they have been consistently hawkish about rates for at least a year and are sticking to it. We tend to agree with this view.

(New York)

The biggest and most famous investor of them all just took a big position in US financials. In particular, Warren Buffett just made a large investment in JP Morgan to the tune of $4 bn. Buffett already holds a $23 bn position in Wells Fargo. Berkshire Hathaway has a history of making successful investments in banks, including in Bank of America. Buffett also boosted its holdings in BAC, Goldman Sachs, and US Bancorp.

FINSUM: Rising rates are good for banks. Recessions are not. The risk and reward is clear.

(New York)

One of the guiding mantras of small cap investing has always been that small caps tend to outperform their larger peers over the long-term. While always cyclical, small caps have outperformed large caps over the last several decades. However, in recent years that has all changed. In fact, since 2005, the relative performance between the two share classes has been trendless, with no discernible relationship. This is directly counter to the almost century-long trend that preceded it. One CIO explained the change this way, saying “Market-cap tilts have historically been about catching, and riding, strong and persistent performance waves … Over the last 13 years, in an unconventional fashion, the opportunities to add performance from cap tilts have been relatively small and have required frequent and expert timing”.

FINSUM: Interesting change for small caps. We suspect the change has to do with a combination of the pre-Crisis boom and the extraordinary liquidity thereafter.