Bank of America has just made a bold call on the direction of yields. The bank has sharply increased its forecasts for where bond yields will be at the end of the year. Its previous forecast for the ten-year was 1.25%, but it has just moved that up to 2%. It made similar adjustments to its forecast for German and British bonds. “Relative to our more pessimistic revision in August, the US and China are working to de-escalate trade tensions, no-deal Brexit risks have been banished for now, global data have started to stabilize, and central banks have shifted from dovish to neutral policy stances”.
FINSUM: Based on the change in mood amongst investors and central banks, this forecasted change makes total sense to us.
The Fed finally paused. Investors were worried about it, but it happened as many expected. The Fed decided to lower rates another 25 bp yesterday, but said that for the time being, it would stop worrying about the possible trade war. Analysts interpret Powell’s statements as indicating that the Fed wants to wait to see weakness in the US consumer before undertaking any more rate cuts.
FINSUM: Some are perplexed by this pause because none of the three main things the Fed is worried about have actually improved.
There is a lot of investor anxiety about a recession right now. The big economic expansion of the last decade does have the feel of an ending coming, but even if that is true, how should one react? According to Barron’s the answer is to employ a long-term buy and hold strategy. That said, many don’t have the stomach or cash for such a strategy. A better way to think about allocation is to consider the type of recession we might have: will it be driven by a real economic downturn, a policy error, or a crisis—each have highly different return profiles? In this instance, a recession seems more likely to come from a real economic slowdown, which is good news for investors. Such recessions generally have significantly lesser falls in stock prices than the other varieties.
FINSUM: The reality is that we are likely having a “soft landing” type of recession where the economy slows gradually. That means we might not have a bear market at all.
New US GDP data has been released and it is not good news. Though, it is isn’t exactly terrible either. US third quarter growth was 1.9%, the lowest level of 2019. The fall in pace was caused by a reduction in business investment. The pace of growth was 2.0% in the second quarter. The 1.9% rate actually exceeded estimates of 1.6% despite still being the weakest result of the year.
FINSUM: So the big question here is how the Fed will react to this news. They have generally had a glass-half-full approach, so this may keep them from proceeding with cuts, but we’d bet they undertake one more “insurance” cut.
Investors have been playing defense in stocks for months. Everyone has been very spooked by economic data and the trade war, which has caused a rotation into defensive sectors. However, a top manager at Fidelity, Denise Chisholm, is saying the opposite: it is time to play offense. Her core argument is that real interest rates in the US are negative--which happened after the Crisis and also in the 1970s and 1980s—which is highly bullish for the stock market. Further, the ECB and Fed are cutting at the same time, a quite rare occurrence, and one that has always led to an equity market rally.
FINSUM: This is an interesting contrarian argument. We particularly like the ECB + Fed narrative.