WEBVTT

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We came into the year

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expecting a tougher climb for investors

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and that's just what we got in the third quarter.

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Financial markets have become more volatile

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as doubts grow about global growth

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and policymakers abilities to turn things around.

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The two areas where we've been the most surprised have been

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the series of escalations in the U.S./China Trade War

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and the sharp drop in global interest rates.

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Of course, the two are related but we think the fallen rates

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will ultimately prove to be overdone,

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even if a tariff-reducing deal

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between the U.S. and China remains elusive for now.

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We've seen an abrupt downturn

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in global manufacturing activity over the past few quarters,

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but there's actually some welcome evidence

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that the rate of contraction may be slowing

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and that service-based economies

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like the United States will avoid recession.

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The U.S. economy relies chiefly on the strength

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of the U.S. consumer and with high savings rates,

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strong household balance sheets and growing wages,

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we don't think that's a bad thing.

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Outside the U.S., the story is more mixed.

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China is still slowing and Germany

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may have a shallow recession this year.

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The good news is that central banks are on the case.

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Cutting interest rates and in some cases,

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reintroducing measures that were helpful at times

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during the recovery from the global financial crisis.

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The concept of the negative interest rates

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has the potential to break a person's brain.

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Why would someone lend money to someone else

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and pay for the privilege?

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It's a sign that investors are becoming more cautious

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and bidding up the prices of safer assets

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like government bonds to extremely high levels.

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Fortunately, there is still lot's of

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fixed income securities out there,

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U.S. corporates or emerging market bonds,

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for instance, with solid positive yields,

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and in a period of ultra low interest rates,

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we think they're likely to outperform

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U.S. Treasuries or German Bunds.

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As for negative interest rates, we think in many cases,

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they reflect an overly pessimistic outlook

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for growth and inflation,

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but they may be here to stay for the time being

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with central banks tilting more dovish by them all.

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While we are relatively optimistic

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that the U.S. will avoid recession the next two years,

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we also think the returns on most major asset classes

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will be low for the foreseeable future.

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Earning this growth drives equity markets

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and the markets expectations for that growth

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have been revised down significantly for 2019 and 2020

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because of the trade war

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and the broadly weak global economic story.

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On the fixed income side,

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investors are not being compensated as handsomely

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for taking credit risks as they were a few quarters ago.

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So in both stock and bond markets, we're de-risking a bit,

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not into cash, but into higher quality assets.

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The case for earning stocks relative to bonds or cash

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is actually quite strong right now.

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Almost everywhere in the world.

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But the cases for taking a lot of cyclical risk in stocks

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or credit risk in bonds

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have weakened since the start of the year.