A Cure for Market Myopia: What You Need to Know About the Macro Picture in 2019
Brexit, the Sino-American trade war, a yield curve inversion, and an uncertain Fed policy.
There's a lot to consider for investors aside from the balance sheets or charts of specific companies in 2019.
The most alarming signal so far in 2019 is the inversion of the 90 day and 10-year yield curves seen in March.
In the Bretton Woods era, such an inversion has been an infallible indicator of a coming recession.
However, it might not be time to hit the panic button just yet according to AXA Investment Managers Senior Economist David Page.
"We think it's right to spook investors," he acknowledged.
"But what we need to see from a yield curve inversion is not just for it to cross for a day or two, it's more persistent signals that need to come through." Page added that since the curve has recovered quickly and supplementary signals from the credit markets are not following along with a recession signal, it shouldn't fray nerves too much yet.
"The yield curve is not a barometer, it's not something that's a handy tool to predict, it's actually causal," he explained.
"The yield curve inversion is something that changes the dynamics of the bank lending process." Fed Flip Flop Breaking stride with some of his peers who have said the Fed may need to cut after tightening too quickly in 2018, Page sees the Fed standing pat in 2019.
"We see the Fed on hold in 2019," he explained.
"The story of this year has been the Fed's pivot and the market's anticipation that the pivot has further to run and that the Fed will cut." He said that markets may need to reassess this outlook in the back half of the year as the fluid Fed policy may reverse again.
The upside for equity markets is still present in Page's view into the back half the year regardless.
"On balance, although the U.S. equity market has done very well over the past three months, it will be modestly risk on over the course of the rest of the year," he said.
Brexit Impact "The process is a mess," Page said, summing up the feeling of many investors anxiously watching negotiations.
He noted that he believes a "hard Brexit" or "no deal" exit is likely to be avoided.
"If we avoid [hard Brexit] and go into our preferred outlook of an extension for some time, that's not great for the U.K. economy and it maintains the uncertainty, but it avoids the no deal," Page explained.
"If the U.K. avoids a no deal exit, which could be potentially disruptive on a global scale, then I think the globe can start to lose interest in the ongoing debate of Brexit." Timing Trade Tensions Many investors may have lost sight of trade impacts on markets since a tepid truce alleviated much of the anxiety that battered markets into the back half of the year as tariff hike rumors abounded.
Moody's recently awoke more interest in negotiations with the warning that recession could be imminent if there is not a solution to the impasse at present and quickly.
While Page was not overly optimistic on a resolution, he noted that a truce could lead to a more benign environment sans a deal.
"The trade tensions are going to remain not for quarters, but for years," he said.
"But in terms of a short-term benign outcome over the course of the second quarter, we think that's the most likely." He concluded that an extended truce could prove disappointing to some, but is much preferable to the anxiety that wracked markets in previous months.
For more on the macro environment and Page's full thoughts on the macro picture at present, check out the video interview above.