03/25/2019
Meanwhile, We Maintain an Optimistic Outlook  
Renewed concerns of slowing global growth, in Europe in particular, sent stock prices and bond yields sharply lower on Friday. Friday’s report of weaker than expected manufacturing activity within the Eurozone, especially in Germany, sent stocks on the continent sharply lower and pushed the German ten-year bond yield into negative territory for the first time since October 2016. The selling extended to the U.S., as the S&P 500 fell almost 2 percent and the yield curve between the 3-month bill and ten-year note inverted, historically an accurate, although not infallible harbinger of recession. Cyclical stocks bore the brunt of the selling, led to the downside by materials, financials and energy. Asian stocks caught up to Friday’s weakness in Monday trading this week, as the Nikkei fell 3 percent overnight and the Shanghai Composite fell 2 percent.

Friday’s selloff followed a Thursday session in which stocks rose and bond yields edged higher, after investors spent a day considering the supportive market implications of the Fed’s surprisingly dovish meeting. But the good feeling proved fleeting following release of the weak Eurozone data.

At its meeting on Wednesday, the Fed left rates unchanged as expected, and acknowledged the slowdown in global activity while lowering its forecast of U.S. economic growth this year to 2.1 percent from 2.3 percent in December. It also signaled that it anticipated no rate hikes at all this year, down from two in its December forecast, and just one rate hike next year. It also indicated a September end to its balance sheet runoff. Although the Fed envisions growth this year that would still be above trend, its forecast revisions were generally reflective of a decelerating growth environment, a more downbeat assessment into which the weakness in Europe fed on Friday.

While inverted yield curves have a strong track record of foreshadowing recessions, they don’t always follow. And when they do, there is typically an extended period of time between the initial inversion and onset of the subsequent recession. The last time it happened, in February 2006, the recession didn’t arrive for another 22 months. And the S&P 500 rose by roughly 15 percent in the interim. But the current message of the yield curve is clear. Growth remains weak with faint evidence of improvement.

Brexit and Trade Negotiations with China Remain Top of Mind

This week was to have been the drop-dead date for Brexit, but a deal was reached with the EU to extend the deadline to April 12 if Parliament turns down Mrs. May’s deal once again, as seems likely. What difference another two weeks will make to a process that has already extended for two years since the UK invoked Article 50 signaling its intention to leave the EU is unclear. The deadline would be extended to May 22 if Parliament unexpectedly approves the plan. Anything longer would require the UK to participate in EU elections, which also seems unlikely. The pound rose on Friday following news of the extension, but stocks fell in concert with markets elsewhere.

Trade negotiations with China are scheduled to resume this week with U.S. representatives traveling to Beijing, and with the Chinese delegation going to Washington the following week, with both sides aiming for an agreement by the end of April. Next Sunday China will deliver the latest report on strength in its manufacturing sector. Modest improvement in the pace of contraction is expected. Given the importance of economic growth in China to the rest of the globe, especially export-dependent countries like Germany, any surprise deterioration will be received poorly. 

Investors Look for Signs of a Healthy Global Economy 

Given these pervasive growth concerns, the economic calendar takes on renewed importance. In the U.S. this week, scheduled reports include revised Q4 GDP, housing starts, permits, pending and new home sales, consumer confidence and sentiment, and the January PCE deflator. In the Eurozone, a new round of sentiment surveys is scheduled, along with retail sales in Germany. And in Japan, industrial production, retail sales and consumer prices are scheduled.

In light of last week’s growth jitters, it is worth noting that our own view is less pessimistic. While we acknowledge the global slowdown, efforts to stimulate growth must also be recognized, especially in China and the U.S. despite still faint evidence of its effects. There is scope for fiscal stimulus in Germany as well, although little consensus to use it yet. In addition, monetary policy has taken a dovish turn, as evidenced by the shifting outlook at the Fed and the recent dovish guidance by the European Central Bank. Our 2.4 percent forecast for U.S. growth this year anticipates a weak first quarter, followed by renewed strength in the second and third quarters, supported by fiscal stimulus, accommodative monetary policy, a strong labor market and solid consumer balance sheets.

Evidence of economic stabilization would certainly be supportive of sentiment, which may remain negative unless and until such evidence surfaces. And progress on the trade front, both with China and the EU, would be supportive as well. It would also help if the UK gets its act together regarding Brexit. Collectively, that is a lot to ask, but we believe the elements are in place to engineer an environment of economic stabilization that is supportive of risk assets. But the risks are manifest and argue for the maintenance of portfolio balance and modest risk exposure.        
                  
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.

Past performance is not a guarantee of future results.

The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.

The Nikkei index is a price-weighted average of 225 stocks of the first section of the Tokyo Stock Exchange.

The Shanghai Composite Index is a capitalization-weighted index of all stocks on China’s Shanghai Stock Exchange.

The Manufacturing Purchasing Managers' Index (PMI) measures the activity level of purchasing managers in the manufacturing sector. A reading above 50 indicates expansion in the sector; below 50 indicates contraction. Traders watch these surveys closely as purchasing managers usually have early access to data about their company’s performance, which can be a leading indicator of overall economic performance.

The information and opinions in this article are compiled from third party sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed