Q4 2016 CIO Insights
An unusual combination of risk-on and risk-off behavior has pervaded the capital markets, reflecting, in part, uncertainties about the political and emotional undertones that triggered Brexit and could steer the outcome of the U.S. presidential election.
Last quarter, we wrote about how global events are playing a greater role in driving all markets and economic policies than in the past, and how we can no longer be U.S.-centric in our views. In particular, we saw how Brexit (the unexpected United Kingdom vote to leave the European Union) roiled the markets at the end of June and changed central bank monetary policies and market expectations. Earlier this year and last year, China was the focal point, following its economic deceleration and currency devaluations.
Brexit was different from the China-related turmoil in that it focused global attention on political and emotional factors—increasing populism and anti-globalization—that are capable of producing significant economic and market impacts. We’re watching the U.S. presidential election very closely to see if the major themes that Brexit helped spotlight—nationalism/isolationism, anti-immigration, anti-trade agreements, distrust of career politicians, etc.—shape future U.S. government leadership as they have in the United Kingdom.
“This year’s U.S. presidential election is particularly meaningful for the markets.”
What do populism and anti-globalization mean for the global economy and the markets? In theory, they’re disruptive and constrain growth, interfering with free flows of intellectual and financial capital, with possible ramifications for corporate profits, interest rates, and relative currency valuations.
From a nearer-term standpoint, the rising tide of populism and anti-globalization has helped increase uncertainty in an already weak and vulnerable global economy. Central banks around the world continue providing record amounts of stimulus, keeping interest rates at extraordinarily low levels, which helps support equity market expectations and valuations. The S&P 500® Index reached record highs this year while U.S. Treasury yields and high-yield corporate yields declined and stayed relatively low (see below). It’s unusual to see U.S. stocks, Treasuries, and high-yield corporate bonds rally simultaneously, which is a cautionary factor in itself.
As a result of the factors and uncertainties highlighted in this piece, this year’s U.S. presidential election is particularly meaningful for the markets. Our discipline CIOs outline their market views in their respective CIO Insights this quarter.
Bloomberg Barclays U.S. Corporate High-Yield Bond Index
Covers the universe of fixed-rate, non-investment grade corporate debt of issuers in non-emerging market countries. Eurobonds and debt issues from countries designated as emerging markets are excluded.
Generally, as interest rates rise, bond values will decline. The opposite is true when
interest rates decline.
The opinions expressed are those of G. David MacEwen and Victor Zhang and are no guarantee of the future performance of any American Century Investments portfolio.
For educational use only. This information is not intended to serve as investment advice.