5 Treats for Halloween

by: , Portfolio Strategist, New York Life Investment Management

No tricks needed for investors this Halloween as market volatility is enough to keep the ghosts away. Instead, here are five treats to help sweeten your perspective.

1. PMIs are solidly in expansion territory

The Purchasing Managers Index (PMI) is a barometer of the business environment. A reading well above 50, shown in the chart below, indicates that conditions are supportive of higher sales, growing profits, and increased investment.

Institute for Supply Management PMIs

Source: Bloomberg, Institute for Supply Management (ISM), NYLI SAS, 10/31/18.

 2. Credit Spreads remain tight

Fixed income investors are historically first movers. Time and time again they foresee deteriorations in credit fundamentals as the economy approaches recession — big or small. Today’s sell-off has done little to move the spread between risk free bonds and its riskier counterparts.

Corporate Bond Spreads

Source: Thomson Reuters DataStream, Bank of America Merrill Lynch, NYLI SAS, 10/31/18. Investment Grade is represented by the BofA ML US Corp BBB Yield to worst and High Yield is represented by the BofA ML High Yield Master II. The spread is calculated as a percentage by subtracting the US Benchmark 10 Year Government Bond Index.

3. Monetary policy is not (yet) restrictive

The Federal Reserve is hiking interest rates, but the moves thus far have remained well within the realm of accommodative policy. Only recently has the real federal funds rate (short term bank borrowing less inflation) moved out of negative territory.

Real Monetary Policy

Source: Thomson Reuters DataStream, Bureau of Economic Analysis, Federal Reserve, 10.31.18. The Real Federal Funds Rate is calculated by taking the federal funds rate and subtracting inflation (represented by the %YoY change in personal consumption expenditure less food and energy).

4. Fiscal stimulus is expansionary

Tax cuts and spending increases are a big factor in this year’s economic growth, and the CBO expects spending to continue into 2019 – further fueling growth.

Impact of Fiscal Policy on GDP

Source: Bloomberg, NYLIM, 4/2/18. SAS Group estimates based on historical relationship between financial conditions and GDP growth and, for the Hutchins fiscal impact measure, the Brookings Institution. The GDP impact is estimated based on what is known today and is projected for 2018-19. An investment cannot be made in an index. Past performance is not indicative of future results.

5. Confidence is robust

Measures of confidence among both businesses and consumers is at or near all-time highs showing little sign of fading. Consumer confidence is likely to remain robust as wages are likely to grow with the further decline of the unemployment rate. Small businesses are remarkably confident despite trade disagreement between China and the US.

Consumer Confidence Index

Source: Thomson Reuters DataStream, The conference Board, NYLI SAS, 10/30/2018.

Bottom Line

To be candid, we are not sure when the market’s pull back will reverse – there may be more ‘tricks’ in the near-term. That said, it is our belief that the recent sell-off has priced too sharp of a near-term growth slowdown. Based on this data it appears to us that the economy is firmly in expansion and a recession is unlikely anytime soon. Moreover, far more potential return has been sacrificed by investors preparing for corrections (or trying to anticipate corrections) than has been lost in the corrections themselves.

Disclosure

Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. New York Life Investments does not guarantee their accuracy or completeness, nor does New York Life Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

About Risk

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.

credit spread is the difference in yield between two bonds of similar maturity, but different credit quality.

The Institute for Supply Management (ISM) is a non-profit organization that serves professionals, who are employed in the supply management profession. The Institute for Supply Management provides educational resources to its members, as well as creating industry standards. ISM polls its members about factors affecting their business, compiling this information in reports.

New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, New York, New York 10010, provides investment advisory products and services. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Robert Serenbetz

Portfolio Strategist, New York Life Investment Management

Robert Serenbetz is the Portfolio Strategist with New York Life Investment Management’s Strategic Asset Allocation & Solutions (SAS) Group. He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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