What the Great "Satchel" Paige Can Teach Us About Today's Market:
July 8, 2019
By Mike Moreland
Vice President Investments
We look at our Weekly Commentaries as an opportunity to inform, educate and provide insight as to how events in the world affect the management of your portfolios. We try to keep them short, sweet, and most importantly, interesting.
The articles usually follow one of three main themes:
- Updates on significant market or economic events and our interpretation of them;
- Comments on issues that are timely but not necessarily time-sensitive; and
- Broader ‘thought pieces’ that spell out our views and expectations for the economy and markets.
Our commentary this week fits in the latter category. It’s a quarterly piece, which helps build the framework of our management decisions. It’s a collaborative process, involving research, conference calls with prominent Wall Street strategists and consensus among those directly responsible for managing your investments. We hope you find it interesting and useful.
“Don’t Look Back. Something Might Be Gaining On You.”
Leroy ‘Satchel’ Paige (or Satchell with two L's, depending on who you ask) was one of the best pitchers of the 20th century, with a career spanning four decades. Most years, he competed in the Negro Leagues before the integration of Major League Baseball. A contemporary, Cool Papa Bell, once said, “He made his living by throwing the ball to a spot over the plate the size of a matchbook.” Paige's quotes, one of which is the title of this paragraph, are part of American lore. Satchel was inducted into the Baseball Hall of Fame in 1971.
In the world of investing, there is something different coming up behind us — and perhaps also on the horizon. Global growth is slowing, and inflation remains moribund. Tariff battles continue. Central banks around the world are recognizing that ending monetary stimulus is increasingly inappropriate, and our own Federal Reserve is slowly and belatedly coming around to the same view. The tables below illustrate the changing environment:
Global Purchasing Managers' Index
Source: J.P. Morgan Guide to the Markets, May 31, 2019
Year-over-year Headline Inflation
Source: J.P. Morgan Guide to the Markets, May 31, 2019
The Purchasing Managers Index is not widely known, but it is closely followed by financial markets. Purchasing managers track orders to insure availability of components for a company’s output. They are considered the ‘canary in the coal mine’ for changes in manufacturing trends and, as such, economic activity as a whole. Note that, while still moving forward, the pace of growth is decelerating.
And broad-based inflation, with industry-specific exceptions, remains below the desired 2.0-percent level in most economies. This is a particular conundrum for our Federal Reserve. It has considered low inflation as ‘transitory’ for the better part of a decade now as part of its justification for raising short term interest rates. Unexpectedly poor employment data reported in early June helped encourage several Fed members to soften their views, reflected in the more dovish tone of the June Open Market Committee statement.
Bond markets anticipated this change. Yields on the benchmark ten year U.S. Treasury note fell to the lowest level since 2017 by early June. The yield curve from 90 days to 10 years is now solidly inverted, a historically reliable indicator of recessionary times ahead.
U.S. Treasury Actives Curve
Source: Bloomberg Financial, L.P.
But not all indicators are pointing south. It is said that the most dangerous phrase in investing is, ‘this time it’s different.’ We take this seriously, but maintain an awareness of contra-indicators. Staying with fixed income, credit spreads — the difference in yields between lower- and higher-quality bonds — remain low and below their long term averages. While supply and demand considerations can distort this, a widening of quality spreads is a logical expectation if a recession is around the corner. We’re not there at mid-year.
Source: SPDR® ETFs Chart Packet, May 31, 2019
We believe the U.S. economy is entering a soft spot but will not fall into recession. Much depends on the success of tariff negotiations, particularly with China, not only for economic prospects but for inflation as well. Second quarter GDP data is tracking much slower than that of the first, but it will retain a ‘plus’ sign. This bodes well for financial assets through the second half of the year.
A Federal Reserve more attuned to slower growth and stubbornly low inflation should open the door to cuts in the third quarter of 2019. This will provide support for bond prices even though markets appear ahead of the curve, with cuts now ‘baked in’ to market expectations. Fixed income total returns have been favorable through the first half of the year; we expect these gains to hold.
Equities should provide reasonable returns in the second half as well. We are concerned, however, that price momentum is being driven more by anticipated easing of monetary policy than by economic fundamentals. Absent other considerations this is not necessarily bad. Right now, however, prices are elevated by historic standards, leaving little margin for error. We have discussed Shiller valuation metrics in past Commentaries.
This longer-term standard shows this concern in clear detail:
“What’s Scary In Life Is Not What People Know. It’s What They Know That Ain’t So.”
We close with a second Satchel Paige quote. It suggests we maintain a defensive, broadly diversified portfolio structure for both equity and fixed income. Attention to valuation is paramount. This is consistent with our core philosophy. We expect it to serve our clients well if the economy, the tariff battles, central banks, or the markets throw us an unexpected curve ball.
And one more thing … We’ve added a comments section at the end of each week’s write-up. Please let us know what you think or what topics you might like covered. Communication, by definition, is a two-way street. Let us hear from you. Or, for a more specific view of how we are managing your funds, contact your Advisor today.
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