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By Rich Weiss - April 8, 2019
How 'bout this market?
Six months ago, I called it a "split personality"—and its performance continues to support my theory. After a rough second half of 2018, we've seen a notable turnaround in 2019. How much longer can it last? That's the subject of this quarter's outlook video.
I factored four metrics into my evaluation:
The global macroeconomic landscape
The Federal Reserve's decision to pause interest rates
The strength of the U.S. dollar
I've said it before, and I'll say it again: You can't deny the economic cycle. That's why we're positioning our portfolios based on long-term fundamentals.
So far this year, the markets have recovered sharply, but we are more focused on the longer-term fundamentals. We're more cautiously positioned right now.
At the start of this year we had a nice bounce in the financial markets, and particularly the equity markets around the world. The S&P 500® Index is up 10% so far this year, and the same is true for most of the developed equity markets. That is, it's a spark, it's a very good start to 2019, but it may not last.
Unfortunately, the global macroeconomic landscape is weak, and perhaps more importantly, getting weaker. That is, global economic growth across the developed world is ranging anywhere in real terms from one to two percent this year. And that's widely forecasted by most economists, including American Century's best outlook. And that includes the U.S. The U.S. is perhaps doing a little better, maybe coming in at somewhere around two, two and half percent real economic growth this year, but again, the important facet of this is that going forward into 2020 and beyond, the outlook for growth is waning. So, we still expect positive growth, but it's decelerating. And that's going to have a large impact and is having a large impact arguably on the financial markets currently.
Well, in the short term, and what the markets have been reacting to in a very positive way here in the U.S. and abroad, is the interest rate picture. That is, the Federal Reserve (Fed), as most well know, late last year, early this year, changed course and decided that they were going to not continue on their path of increasing interest rates to slow down the economy and stave off an inflation. Rather, they were going to pause in that effort. And now the markets are actually potentially looking for an interest reduction later this year in deference to a weaker economy. So again, in the short term, lower interest rates are a positive for financial markets, for business, for the consumer, easier access to money, etc. So short-term wind in our sails if you will.
All else equal, lower interest rates at the longer end of the yield curve are stimulative to economic growth. But the insight here is that the Federal Reserve did a fairly abrupt change in policy moving from what's known as a hawkish policy stance where they're raising interest rates, afraid of inflation, trying to slow down inflation and overstimulation, and they moved to a position that is more accommodating, that is, lower interest rates or at least not raising them. So, they've effectively taken their foot off the economic brakes. That's allowed the financial markets to increase this year.
In the short term that's a good thing. However, the focus is there because in the longer turn, it's not necessarily a good thing. There's a darker underbelly to the Fed's policy stance change. And that is, and the best way I can describe it is an analogy to the medical community, when the doctor comes in and says, "You know, I was going to take you off the antibiotics and the medicine, but I think I'm going to keep you on a little longer just in case." Now, that may make you feel good because the medicine makes you feel better, but the bad news there is that you're still sick and you still need the medicine. And that's what's going on here, and that's why there's so much focus on the Fed.
The dollar, which has done very well against the major foreign currencies over the last several years, has appeared to stall out this year. That may be a harbinger of things to come economically here in the U.S. A weaker dollar is not necessarily a good thing for U.S., or a good sign for the future of the U.S. economy.
We've positioned our portfolios based on the longer-term fundamentals, which are not necessarily showing as strong as the stock market has indicated so far this year. We've taken a more cautiously, but optimistic stance. So, we are not chasing the stock market here, we're not throwing money at the stock market. We remain in a well-diversified, balanced position, a more defensive position, diversified position across our portfolios.
Here’s the role the Federal Reserve has played in the 2020 economy, and what policymakers are expecting for the rest of the year.
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The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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