Market Currents

• The Fed. In a closely-watched speech, Federal Reserve Chairman Jerome Powell opined that current rates are “just below” the neutral rate, potentially reversing course from the central bank’s prior hard-rate stance.  Rising rates lower liquidity levels in markets, impact borrowing costs for corporations and households, and pose competition for stocks as investments.  With inflation data still quiescent, Powell’s dovish tone suggests that fewer rate hikes might be necessary than the Fed had previously anticipated.

• Yield Curve Worries. The Fed only controls short-term interest rates, however.  The yield curve measures the level of interest rates at varying maturities.  Its “normal” condition has longer-term interest rates higher than shorter ones.  At present, the curve has flattened, and even inverted, across the maturity spectrum.  Though far from a certainty, an inverted curve correlates with economic slowdowns and even recession.

• Easing Trade Tension. Another highly-anticipated event was that of the G20 summit in Buenos Aries.  President Trump and Chinese President Xi agreed to halt new tariffs for a period of 90 days.  During this time, negotiations around structural reforms governing trade will occur.  Details of the apparent ceasefire are vague at this time, and the trade skirmish is far from over.  The uncertainty is putting both countries under a layer of self-inflicted economic stress.

• Midterm Elections. As widely expected, the Republicans maintained control of the Senate, and Democrats gained control of the House.  With the government divided, expect an increased pace of oversight investigations from the House.  Infrastructure spending may be the only area with room for bipartisanship.

• Global Growth. Around the globe, economic growth has decelerated, due in part to the headwinds and uncertainties brought on by the rate hikes and trade jousting.  Germany and Japan have both contracted in recent months, and China is experiencing a slowdown.  In the US, despite still-strong GDP prints and employment data, growth is slowing from earlier levels.  Housing has softened, and car sales look, in our view, to be near peak levels.  (Both sectors are sensitive to higher interest rates.)

• A Volatile Season. We believe the home stretch of 2018 will remain volatile, and range-bound.  At present, the US stock market is holding on to modest gains, although most other global asset classes are in the red for the year.  Investors are skittish, and we believe the odds increasingly favor a continued softening in economic activity.  But all is not lost—far from it.  Companies continue to garner an earnings benefit from the tax overhaul.  Consumer confidence is high, and the labor market is strong.  Valuation, thanks to the ongoing stock market correction, is reasonable.  Despite the near-term chop, we believe a thoughtful, long-term approach to risk assets will continue to be rewarded.