My Mid Term ETF Investments
Blackrock World Technology Fund A2 USD
Blackrock World Gold Fund A2 USD
Allianz Global Artificial Intelligence AT Acc USD
Blackrock China Fund A2 USD
Predicting a recession is a notoriously difficult undertaking — both for investors and financial experts.
Yield curve inversions, a rare phenomenon, are often interpreted as a sign of recession. Since the late 1960s, there have been about nine episodes of a protracted yield curve inversion, with each later followed by a slowdown.
Thus, when the yield for 10-year U.S. Treasury notes dipped below that of three-month Treasury bills in late March, it spurred much debate about whether the next recession is looming. According to the Federal Reserve Bank of New York, there is a 25% probability of a U.S. recession in the next 12 months, based on Treasury spreads.
We beg to differ. The outlook for the global economy, and in turn financial markets, may not be nearly as bleak as the yield curve suggests.
We estimate the probability of a recession in the U.S. at less than 10% in the next 12 months, less than 20% in two years and just over 30% in three years. Contrary to commonly used models such as that of the New York Fed, our model does not include market data but focuses on structural macro data such as consumption and income balances and central bank accommodation.
The yield curve is clearly an important indicator to look at, though it does not pinpoint the precise timing of a recession. The yield curve inversion between July 2000 and January 2001, for example, was followed by a U.S. recession between March and November 2001. The yield curve inverted again in July 2006 to May 2007 ahead of the global financial crisis in the autumn of 2008.
As the circumstances of each recession are different, it is prudent to look at the bigger picture. First, certain conditions have changed over the past decade: Following the 2008 financial crisis, major central banks introduced significant quantitative easing measures that have moved bond markets and yields to levels where an inversion of the yield curve is more likely now than in previous economic cycles. This diminishes the role of yield curve inversions as a recession bellwether.
Furthermore, other structural macroeconomic factors can potentially signal a recession. It is therefore important to look at labor markets, corporate and consumer debt, the fiscal policy of major central banks, and the state of the Chinese economy, to name just a few. None of these signals currently point to an impending downturn.
So where does this leave the global economy? It is in the late phase of an extended economic cycle, and global growth should reaccelerate in the second half of 2019, providing late-cycle opportunities for investors.
The good news for investors is that the clear uptrend we saw in financial markets during the first quarter should continue in the coming months. This view is based on changes in underlying conditions that have altered the big picture in recent months.
The most noticeable shift has been in U.S. monetary policy. While U.S. labor markets remain strong, the U.S. Federal Reserve has signaled that it will not hike further this year, while the European Central Bank has also put rate hikes on hold. The Fed’s new policy of patience came after a historically turbulent fourth quarter for financial markets in 2018 as a number of issues — slumping global industrial production, Brexit, the U.S.-China trade war, and a hawkish Fed — scared off investors.
At the same time, the Chinese economy appears to be on the mend. The latest Purchasing Managers’ Index in China rose above 50 to enter expansionary territory for the first time in four months, with new orders and purchase volumes advancing. Such improvements indicate that the Chinese government’s fiscal and monetary stimulus is helping to strengthen the economy. Any resolution in the current U.S.-China trade dispute would provide additional support. As China’s economy picks up steam, other economies, including the export-oriented euro zone, should improve as well.
These combined factors should bode well for financial markets and risky assets in particular in coming months. Equities, real estate and commodities all stand to benefit. For the investors who missed the first-quarter rally, there should be future opportunities to participate in rising markets. Any small correction in equities in the coming months could be viewed as an opportunity to re-enter the market.
Investors now find themselves back to where they were in the fall of 2018 — before the fourth-quarter correction — when U.S. equity markets were hitting all-time highs. Economic cycles do not last forever. But for now, focusing on the likely upside ahead should prove rewarding.
—Michael Strobaek is the global chief investment officer at Credit Suisse.
An old investing rule of thumb is working better than it has in a while.
It’s called the “60-40” rule — which describes a portfolio made up of 60 percent stocks and 40 percent fixed-income securities. Advisors have recommended the balance as a middle-of-the-road way of investing. It puts the majority of an investor’s money into stocks, which are riskier but higher yielding than bonds, while still having a solid amount held in government, corporate and agency bonds.
The Vanguard Balanced Index fund
, which mirrors that portfolio rule, just had its best quarter in nearly a decade with a 9.5 percent gain in the first quarter.
The approach is usually more of a hedge. When stocks do well, it’s not typically the case that bond prices also rally. But this year has been different, thanks to the Federal Reserve.
The Fed signaled in January that it was putting the brakes on raising its short-term benchmark rates. Investors embraced the stance and bought bonds, pushing their prices higher as the yields fell. That also boosted stocks. Higher rates can sometimes dampen enthusiasm for stocks because rising borrowing costs eat into corporate profits and can make earnings valuation look too high.
Bond yields and prices move in opposite directions. In this case, lower yields means higher bond prices, and therefore more value for that 40 percent of an average investors’ “60-40” portfolio. With the Fed no longer a roadblock and the economy chugging along at a respectable 2 percent growth, U.S. stocks and bonds have both been in favor this year.
In other words, the quarter was “the perfect storm, in a good way” for investors, according to Paul Schatz, president at Heritage Capital.
“The rising tide of the first quarter has lifted all ships, debris and just about anything and everything in the ocean,” Schatz said. “The 60-40 portfolio was an easy winner.”
The other factor boosting U.S. Treasurys was how good they looked compared with the rest of the world. The German and Japanese 10-year government bonds, for instance, both yield negative interest rates. Any return looks great in comparison, especially for global investors looking for a place to park their money. The U.S. 10-year yields just under 2.5 percent.
“We might think of U.S. bonds as low income — but for the rest of the world it’s like a high yield bond,” said Ken Kamen, president of Mercadien Asset Management. “Worldwide demand is helping.”
The amount a retail investor should put in stocks versus bonds has a lot to do with their tolerance for risk and how close they are to retiring. Advisors often recommend that younger investors invest a greater portion of their money in stocks, or around 80 percent. Someone who is retired, on the other hand, might put 30 percent in stocks and have 70 percent in bonds.
Will it last?
Another rule of thumb advisors have used over the years is to subtract their age from 100. The remainder is the percentage of their portfolio that should be in stocks, some advisors say.
“It is the default for people, it has worked for the past 30 years and it continues to work,” said Rick Ferri, investment advisor and author of “All About Asset Allocation.” “It’s a pretty nice long-term allocation that outperforms most endowment funds for years, and is a tough balance to beat.”
Ric Edelman, CEO of Edelman Financial Services, said the fact that the 60-40 model worked so well is more of a reflection of the strong quarter than anything. The start to 2019 was a “a wonderful environment” for both stocks and bonds, he said. But that might not last.
“Sixty-forty has never not worked,” said Edelman. “But it’s unrealistic that the pace continues. We need to temper our enthusiasm.”
Based on the first quarter’s double-digit rally, if the S&P 500 stayed on the same growth trajectory, it would end the year up by more than 40 percent. Edelman expects that growth in share prices to retract, or slow at the very least.
Others are less excited about the old-school model, regardless of how great the quarter was. As money manager Peter Tanous put it — the 60-40 model is “dead.” Tanous, who has been in the business for 50 years, said there was a time when it worked great because bonds would kick back 8 percent.
“The problem is, that has not been true for a number of years,” Tanous told CNBC. In the prolonged low-rate environment over the last decade, “the 40 percent in bonds is sitting there ’doing nothing.”
“You need to look for other creative ways to create income, and you may need to take a little more risk compared to the old days,” he said.