Taking Stock: Making Sense of Recent Market Movements

Holidays usually serve as a welcome break to celebrate with family, reflect on all for which we are thankful, and to recharge before the sprint of a new year. Unfortunately, markets do not appear willing to provide that luxury this year. To this end, our annual process of setting an outlook for global capital markets produced a set of themes with a more defensive tilt.

For the last several years, we believed that the US economic cycle had room to run and that the Federal Reserve would continue its policy of gradually withdrawing monetary stimulation. That said, we now see markets and economic indicators behaving like they would during the late stage of an expansionary cycle, and a tightening of global liquidity. In line with this more defensive outlook, we have increased our return expectations for safe-haven fixed income and generally reduced expectations for equities.¹

Markets have reflected this defensive outlook over the last several weeks with equities selling off, volatility rising and rates rallying. These market shifts, in part, appear to be reacting to headline events such as the trade war between the US and China, a potential shutdown of the US government, and the uncertainties around Brexit; also influencing markets is a general trend the world over of softening economic data.

In some ways, this market activity validates our defensive outlook. Yet, we believe the recent moves are a bit of an overreaction. Even as economic indicators begin to waver—a symptom of being in the late stage of an expansionary phase—growth is still positive.

At NEPC, we are vigilantly monitoring the markets as we determine the best course of action for our clients. It is very possible that through this evaluation, we may communicate a message of rebalancing to targets in the near term even as our medium-term outlook suggests becoming more defensive and building better balance in portfolios.

We thank all our clients for the trust they have placed in us. We wish you all happy holidays and look forward to further communications in the new year.

 

¹We use November 30^th data every year to strike our assumptions.