Higher Water Brings Rougher Seas

by: , Economist and Multi-Asset Portfolio Strategist, New York Life Investment Management; Robert Serenbetz, Portfolio Strategist, New York Life Investment Management; Multi-Asset Solutions team, Multi-Asset Solutions team, New York Life Investments

At the beginning of 2019, economic and market conditions aligned for rallies across asset classes. Investor sentiment was foreboding, policy uncertainty was high, and asset prices had fallen sharply – all without a driver from the real economy or company fundamentals.

We expected, correctly, that market sentiment would calm, reverse course, and take asset prices along with it. Those conditions have now played out. The Fed’s newly “patient” stance put a floor on economic conditions, goosed global dollar liquidity, and pushed real borrowing costs down. Economic growth continued to perform on the upside through mid-spring, supporting risk assets.

Looking ahead, we are likely to experience setbacks. Valuations have moved higher, forward-looking economic data has grown a bit wobbly, and trade frictions loom large. Markets have backed away from recent highs, volatility has jumped, and continued shifts in the economy could create further crosscurrents. Where rising tides once raised all ships, higher water has brought rougher seas.

We remain hesitantly constructive on the U.S. economy. Inflation is nowhere in sight; wage growth should be made manageable thanks to previous business investment in productivity-enhancing tools and technology. Threats of global monetary tightening and higher bond yields have receded, shedding a potential impediment to growth. When it comes, the next recession is unlikely to be one that justifies extreme investor fear. Instead, it should help reset investor expectations and kickstart new trends toward higher asset prices.

Still, there are economic and geopolitical risks that we cannot ignore. Some of our leading economic indicators are turning over, and trade and other geopolitical conflicts loom large. Timing economic and credit cycles is extremely difficult, and volatility is sure to be present.

In short, we are cautious. For long-term investors, it is appropriate to move gradually toward a more defensive posture, focusing on generating income across a broad range of sources.

For investors allocating capital to private markets, understanding the balance between risk and reward becomes perhaps more important. Amid rich valuations, competitive deal flow, and late cycle risks, investment requires the confidence to be bold, but the skill and capital to be disciplined.

Based on our views, we believe the following takeaways are key for investors:

Theme Stay invested Begin to de-risk Increase tactical allocation

Approach

  • Build income
  • Focus on cash flows
  • Avoid low quality
  • Diversify exposures
  • Seek lower volatility
  • Shorten duration
  • Imbed flexibility
  • Take advantage of mispricing as it occurs

Asset class

  • Yield-focused equities
  • High quality credits
  • Diversified income sources
  • Municipal bonds
  • Real estate
  • Infrastructure
  • Distressed debt
  • Middle market debt
  • Private equity
  • Multi-asset solutions

Our mid-year outlook, published today, outlines our view on how to invest in late cycle, volatile conditions. We also highlight key risks and opportunities across asset classes.

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

“New York Life Investments” is both a service mark, and the common trade name, of the investment advisors affiliated with New York Life Insurance Company. 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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Lauren Goodwin, CFA

Economist and Multi-Asset Portfolio Strategist, New York Life Investment Management

Lauren Goodwin, CFA is an economist and multi-asset portfolio strategist with New York Life Investment Management’s Multi Asset Solutions (MAS) team, which has $10B in assets under management. She joined NYLIM in 2018 to focus on global macroeconomic trends

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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 Multi Asset Solutions (MAS) team. He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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Multi-Asset Solutions team

Multi-Asset Solutions team, New York Life Investments

Multi-Asset Solution’s (MAS) is New York Life investments’ specialist in multi-asset investing.The team offers multi asset strategies, market intelligence, and customized solutions to its strategic partners. Managed assets include MainStay funds, strategic partnerships and customized solutions with third parties. Investment services include market insights, risk analysis, and financial education. Strategic partnerships are designed to meet bespoke investment objectives, such as income generation or inflation protection, through holistic solutions.

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