In the November issue of our monthly flagship publication, we feature:
- On the Record by Chief Investment Officer Tony Roth delves into the reasons why he and his team feel comfortable reverting to an overweight position in stocks.
- He points to a subtle but important receding of downside risks in recent weeks across three critical domains—policy, global economic data, and corporate earnings.
- As we round the corner on 2019 and head into 2020, we expect competing tensions to continue to pull the global economy in different directions.
The last six months have been tumultuous for stock markets, with policy-related headlines and weakening economic data leading to three different market pullbacks (for the S&P 500) of greater than 4%. Corrections of this magnitude are typical in any calendar year, but it is a bit unusual to see the market reset with this frequency in such a short amount of time, particularly with the end result being a 3.9% price gain for U.S. large-cap stocks.
Over this period, we struck a more cautious but not overly defensive tone, noting that downside risks had grown but still appeared fairly balanced, warranting a neutral position to equities in our portfolios. In recent weeks, we have taken note of a gradual receding of downside risks, and while we have preached patience in adjusting portfolios (to either add or decrease risk), we feel now is the appropriate time to revert to an equities overweight. What has changed? In our view, there has been a subtle but important reduction of risks across three key domains: policy, global economic data, and corporate earnings.
The U.S.–China trade negotiations have been one of the biggest drivers of recent economic- and market-related risks, with a collapse of trade talks in May resulting in higher tariffs and contributing to a weakening of the global manufacturing sector. In particular, the manufacturing weakness that began outside of the U.S. has since spilled over into the U.S., elevating recession risk. We cannot definitively say that trade tensions have peaked, but our strong read is that each of the two key protagonists now find that a truce will serve their respective immediate interests.
In the case of the U.S. administration, we believe the coming election cycle is now providing powerful incentive to find a tariff off-ramp to avoid any further weakening of the U.S. economy. In our view, additional tariffs would risk derailing the U.S. consumer, which has been the anchor of the economy over recent months. That the Trump administration announced the accomplishment of a major Phase 1 agreement in a paparazzi-packed Oval Office display when much remained unsettled provides ample proof, in our view, of a desire to dial back the trade conflict.
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