Key Market/Economic Observations
Yield Curve Inversion Raises Recession Fears
A deteriorating global growth outlook and a briefly inverted U.S. 2-year to 10-year yield curve were enough to pull investor sentiment and U.S. equity markets lower throughout August. Given the historical relationship of curve inversions preceding U.S. recessions, conventional wisdom links these two events. However, in our view, there is no single perfect recession indicator. Our analysis continues to show we are in the later innings of the business cycle, but is not pointing to imminent risk of a recession. Second-quarter earnings season was better than expected and the valuation backdrop continues to be supportive of equities on a fundamental basis.
International Developed Markets
Accommodative Global Monetary Policy Weighs on Interest Rates while Macro Concerns Challenge Fundamental Drivers for Dominance
We believe global central banks are caught in a delicate balance between combating a potential global economic slowdown and weighing the downside risks of prolonged easy monetary policy. Even when hard data do not yet seem to reflect a meaningful deterioration in the fundamental backdrop, headline macro concerns continue to weigh on sentiment, confidence, and the global growth outlook. Furthermore, many countries have not yet had the chance to normalize monetary policy after years of near-zero interest rates. This means central banks have less traditional policy ammunition to support economies should a sooner-than-expected downturn materialize. Reducing already low interest rates comes with the added risk of creating pockets of excess that could eventually hinder, rather than boost, long-term growth.
Escalating Hong Kong Protests an Emerging Risk
Emerging market (EM) equities are on pace for their second worst performing month of the year, down over 5% (as of August 23). While headlines have been dominated by escalating trade tensions and the impact from demonstrations in Hong Kong, the outsized underperformance has been primarily driven by regions outside of Asia. A perfect example of the highly idiosyncratic nature of EM stocks was the 40% decline in the MSCI Argentina Index following unexpected national primary election results.
Commodity Weakness Subdues Inflation Expectations
Commodities moved broadly lower in August with the Bloomberg Commodity index falling 3.6%, led lower by both crude oil and agricultural commodities. West Texas Intermediate crude oil is now -18.6% off its April high, largely due to concerns that trade tensions could further weigh on increasingly uncertain demand estimates. Ultimately, a stronger dollar and lower commodity prices signal that inflation is expected to remain subdued, which we believe should continue to be a tailwind for consumers, the primary driver of U.S. economic growth.
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