04.15.19

Q2 Outlook

Brian Nick

View From the Top

We came into the year expecting a tougher climb for investors and that's just what we got in the third quarter. Financial markets have become more volatile as doubts grow about global growth and policymakers abilities to turn things around. The two areas where we've been the most surprised have been the series of escalations in the U.S./China Trade War and the sharp drop in global interest rates. Of course, the two are related but we think the fallen rates will ultimately prove to be overdone, even if a tariff-reducing deal between the U.S. and China remains elusive for now. We've seen an abrupt downturn in global manufacturing activity over the past few quarters, but there's actually some welcome evidence that the rate of contraction may be slowing and that service-based economies like the United States will avoid recession. The U.S. economy relies chiefly on the strength of the U.S. consumer and with high savings rates, strong household balance sheets and growing wages, we don't think that's a bad thing. Outside the U.S., the story is more mixed. China is still slowing and Germany may have a shallow recession this year. The good news is that central banks are on the case. Cutting interest rates and in some cases, reintroducing measures that were helpful at times during the recovery from the global financial crisis. The concept of the negative interest rates has the potential to break a person's brain. Why would someone lend money to someone else and pay for the privilege? It's a sign that investors are becoming more cautious and bidding up the prices of safer assets like government bonds to extremely high levels. Fortunately, there is still lots of fixed income securities out there, U.S. corporates or emerging market bonds, for instance, with solid positive yields, and in a period of ultra-low interest rates, we think they're likely to outperform U.S. Treasuries or German Bunds. As for negative interest rates, we think in many cases, they reflect an overly pessimistic outlook for growth and inflation, but they may be here to stay for the time being with central banks tilting more dovish by them all. While we are relatively optimistic that the U.S. will avoid recession the next two years, we also think the returns on most major asset classes will be low for the foreseeable future. Earning this growth drives equity markets and the markets expectations for that growth have been revised down significantly for 2019 and 2020 because of the trade war and the broadly weak global economic story. On the fixed income side, investors are not being compensated as handsomely for taking credit risks as they were a few quarters ago. So in both stock and bond markets, we're de-risking a bit, not into cash, but into higher quality assets. The case for earning stocks relative to bonds or cash is actually quite strong right now. Almost everywhere in the world. But the cases for taking a lot of cyclical risk in stocks or credit risk in bonds have weakened since the start of the year.

Global Investment Committee Outlook

2Q | 2019 UPDATE

Expect a tougher climb

Nuveen’s 2019 Outlook, published in early December, told investors to expect a tougher climb. Since then, we’ve experienced a selloff in stocks and other risk assets followed by a strong recovery in the first quarter. That might have been even a tougher climb than we envisioned, but the sort of volatility and uncertainty that investors experienced over the past few months is, unfortunately, pretty typical in the late stages of economic and market cycles. And it’s a reminder of why we encourage our clients to remain invested through times of volatility. Even so, we think we’re in for a challenging environment for the rest of 2019.
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