Global equity market volatility has gained tremendous attention over the past few weeks as major indices captured marginal downside. The on-going news tied to the coronavirus has been largely blamed for the recent volatility as investors may be questioning the impact to global growth if the virus becomes even more widespread. In our view, it’s simply too early to make an objective decision as to the impact that the coronavirus may have to domestic and international economic growth. It’s possible that specific sectors of the economy may see a short-term impact (such as airlines, for example, or the hospitality industry) yet it remains difficult to classify the situation as anything more than short-term uncertainty. We should also consider the possibility that the unfortunate presence of the coronavirus around the world may have given investors a reason to take gains off the table. The lack of downside volatility throughout 2019 proved to be an immense positive for those investors that chose to fully participate in the equity market, and we may be simply witnessing a normal cycle of profit taking. One main reason for such a belief is further grounded in our inability to gauge systemic risks strong enough to cause a deep equity market correction or an economic slowdown. The last cycle of volatility we experienced occurred in the fourth quarter of 2018 and its cause proved to extremely short-lived as investors sought the opportunity to purchase equity market participation on sale. In our view, the lack of systemic risk factors in December of 2018, which was the depth of the last volatility cycle, remains constant today.
Commentary during the week from the Federal Reserve revealed a stance of economic stability in the U.S. with marginal risks abroad. We learned that interest rates will remain unchanged and the Federal Reserve provided an objective assessment of its reasoning. The inaction by the Fed was expected as there was only a 10% probability that interest rates would rise. We should take comfort in the fact that interest rates were not cut by the Fed when considering that economic growth in the U.S. has not faltered. The first estimate of annualized fourth quarter 2019 GDP growth (gross domestic product) was announced at 2.1% during the week, matching economists’ estimates and matching the previous quarter’s growth rate. We were encouraged to see the growth when considering the on-going trade issues with China. Despite the recent agreement on a phase one trade deal, the potential net benefits from such an agreement with China would not have been embedded in the latest GDP report. This could certainly indicate less pressure on trade related growth for future GDP reports and may be signaling that the current business cycle may be prolonged. If that were to materialize it would mean that the latest business cycle, which has already posted strong records, may establish itself as one of the longest growth periods in U.S. history. It’s important to note that the latest report did reveal weaker than expected growth tied to consumer consumption, which is the most important segment of the overall economic growth calculation. We will refrain from attempting to extrapolate further data points from this announcement but it’s something we’re keeping an eye on. If we witness further details to confirm a softer consumption backdrop, we may start to change our view on the eventual shift of the current business cycle. For what it’s worth, consumer confidence data for January surpassed estimates to the upside and is now within close reach to its record high that occurred just 12 months ago. Such data confirms the ongoing health of the labor market and the resilience of the housing market. We remain constructive on the economy, and especially global equity markets, over the next 12 months.
Edison Byzyka, CFA – Chief Investment Officer
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.
All return data sourced from Bloomberg. All other data soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations.
Small Business Optimism sourced through NFIB. Consumer sentiment sourced through the University of Michigan.
Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites.
Interest rate cut/rise probabilities are sourced from Bloomberg’s tracking of futures contracts tied to the Federal Funds interest rate