MARKET COMMENTARY

Taking a More Cautious Stance

08.16.2019 - Viraj B. Patel, CFA, FRM, CAIA

Going into August, many people were likely expecting a quiet end to the month and unofficial end of summer as they headed to beach. However, this abruptly changed following President Trump’s tweet on August 1, announcing a new round of tariffs on Chinese goods. 

Although this most recent tweet was similar to the one he sent in early May, this time it felt like a game changer. The swift and volatile market reaction was likely driven by broken expectations of progress on trade negotiations, coupled with low liquidity due to the lack of market participants. In the 11 trading days since the tweet, markets have experienced six days of +/- 1% moves and two days of +/- 2% moves. While the S&P 500 now sits about 6% off its all-time high, it is worth remembering that pull-backs of this nature are usual and occur frequently in equity markets. It is also important to note that despite the recent bout of negative headlines and volatility, the S&P 500 is still up roughly 15% year to date. 

The recent escalation of the trade war comes at a time of weaker data from both a macro and micro perspective, specifically reflected by the large move in global bond markets. Global yields have been falling dramatically and, in many instances, declined to all-time lows. This is exemplified by the massive amount of global debt with negative yields, which now stands at a record $16 trillion. These global forces also weighed on an already flat US yield curve, continuing to push the yield curve lower, causing the 2-year/10 -year portion of the curve to briefly invert on Wednesday morning.  While an inverted yield curve can be a foreboding signal, simply put, it means the expectations for growth and inflation are lower in the future than they are today.

The move in yields was coupled with the continued weakness in global manufacturing data. While many of the manufacturing data releases have been concerning, the service and consumption portions of the economy remain stable. On the micro front, US second quarter earnings results came in ahead of expectations; however, the earnings beat was largely driven by lower expectations and increased share buybacks.

So, where do we stand?

Earlier this year, the dovish policy pivot by global central banks appeared to be supportive for global financial markets. Despite softening economic and corporate fundamentals, we expected this pivot by the Fed to help sustain a return to a “muddle through” environment for the US economy.  At the time, this view let us to maintain a balanced and neutral stance on global equity markets. However, with an escalation in trade policy and growing uncertainty around monetary policy, our view has shifted, especially as we evaluate the signals being sent by global fixed income markets. 

The policy uncertainty and potential for downside surprises has led us to adopt a more cautious approach and reduce portfolio risk. We are closely monitoring the global backdrop and the potential for continued volatility. Recent signals from markets, such as the yield curve inversion, will likely justify a more cautious stance for the balance of the year.

Peter Repetto, Asset Allocation Associate, contributed to this article.


The information provided is intended solely to provide general information. The information and opinions stated are as of August 16, 2019, and may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy, or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

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