Here at First State Trust Company, we utilize a variety of market commentary from our partners to keep our investment committee up to date on market trends and overall investor sentiment. Over the recent quarter, I have noticed an overwhelming lack of consensus of where the markets might be headed and what the optimal portfolio allocation should be based on the same information. Two partner commentaries I rely on most, Northern Trust & Morgan Stanley, will highlight this conundrum.
Both partners predict multiple interest rate cuts by the Federal Reserve over the next year yet differ on the how it will impact the markets and how to weight portfolios accordingly. Northern Trust believes a further reduction in rates will continue to drive investors towards the higher dividend yields offered by equities. A corresponding overweighting to equities with a US tilt is Northern’s recommendation. Morgan Stanley states the rate cuts at this juncture in the market is “policy capitulation” and continues to prop up US equity markets. They refer to US equities as the “least dirty shirt in the laundry” and believe the odds of an economic recession are accelerating. Their relative weighting is contrarian with underweighting of US equities to International and Emerging Markets.
The differing opinions continue in the fixed income space. Northern takes a long duration stance due to foreign investors valuing the US market due to lower rates overseas and negative yielding bonds representing almost 30% of the of total debt issuance. Morgan favors shorter duration and inflation-protected securities due to concerns about pricing of credit spreads and the significant amount of leverage on corporate balance sheets.
Two areas of agreement are real assets and executive actions by the President. Northern and Morgan agree dividend hungry investors will continue to flock to MLP’s and real estate due to higher yields and inflation protection provided. Both question whether continued dividend growth in these spaces are sustainable in the long term. Executive actions (Executive Power Play & Trump Put at Northern & Morgan, respectively) remain at the forefront of uncertainty for both partners. Both believe President Trump will leverage financial markets as an indicator of economic strength heading into the 2020 election. They believe this will limit the effects of a continued trade dispute with China in the coming year. Although, they disagree on the relative sturdiness of US economy if a trade dispute continues with China. Northern argues the US can continue to withstand trade conflict assuming it doesn’t spread to countries outside of China. Morgan states the trade disputes have meaningfully contributed to the accelerating recessionary indicators and one is most likely on the horizon.
Even though Northern Trust and Morgan Stanley are offering different outlooks on the same macro data, both have been offering the same solution: stay patient and watch the data moving forward. It speaks to the uncertainty within the broader market and the unpredictability of the next twelve months. I agree, uncertainty abounds.
Les Eisel, MBA, Assistant Vice President & Investment Officer
The posts expressed are views of FSTC and are not intended as advice or recommendations. For informational purposes only.