Quarterly Global Perspectives | Voya Investment Management

Quarterly Global Perspectives

Mid-Year Outlook: Market Resilience

July 21, 2022

Executive Summary

  • The party had to stop sometime; central banks are now “taking the punch bowl away” with higher interest rates.
  • With inflation still high and rising and the economic growth slowing, stagflation has emerged as the base case.
  • A severe energy crisis and concomitant high energy prices, primarily in Europe, have been exacerbated by Russian hegemony over natural gas supplies.
  • Despite the burgeoning risks businesses do not get a pass on meeting their profit goals, and this necessity tends to make them resilient in any environment. This time will be no different.
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The U.S. Federal Reserve’s U-Turn

April 21, 2022

Executive Summary

  • The inflation genie is out of the bottle; the Fed let inflation run a little hot, now its scorching due to macro factors and the heat will be felt for some time to come.
  • Through all the gloom, don’t forget the economic boom, which is only now downshifting from great to good.
  • Manufacturing is beginning to strain under weight of inflation, but the game-changing Consumer continues to deliver.
  • The Fed’s policy shift, if it goes ahead, represents a historical and intentionally aggressive U-turn.
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Global Perspectives Market Outlook 2022: As the Economy Booms, Inflation Rings Loud

January 13, 2022

Executive Summary

  • Economic boom continues but the cat is out of the bag, and its name is Inflation
  • The fundamentals of corporate earnings, manufacturing and the game-changing consumer are nothing short of explosive on rising GDP and falling unemployment
  • The U.S. Federal Reserve must gradually rein in inflation with three rate increases starting in March or risk a much more draconian response later
  • We recommend a balanced global portfolio of stocks and bonds in 2022
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The Tug of War Between the Current Economic Boom and Potential Stagflation

October 20, 2021

Executive Summary

  • Volatility is back with a vengeance, or so it seems as the market’s volatility index is currently at its historic norm
  • The fundamentals of corporate earnings, manufacturing and the game-changing consumer are nothing short of explosive
  • Stagflation risks are rising due to cost-push inflation sparked by global supply chain shortages and surging energy prices
  • Surging energy prices on net are good for the United States but deal a crushing blow to energy importers Europe and China
  • Now is a good time to evaluate how certain investments did in a down market and adjust accordingly, but be prepared for the occasional “Santa Claus” rally
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Economic Boom and Peak Inflation Cap Second Quarter 2021

July 8, 2021

Executive Summary

  • The U.S. is now, more than ever, the engine of the global economy
  • The lagged effect of unprecedented stimulus will likely sustain the boom
  • Despite the inflation fireworks the Federal Reserve is determined not to take the “punch bowl” away – the market is not buying it
  • It is sunny today but always be prepared for the unexpected tropical storm
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March Madness Caps the First Quarter of 2021

April 14, 2021

Executive Summary

  • March Madness in financial markets led to solid gains across equities and even pushed Small Caps to the top of the brackets; bonds dropped off the leader boards
  • A roaring economy drove corporate earnings to shatter Wall Street growth expectations by a double-digit error spread margin
  • U.S. and European manufacturing led the way, boding well for corporate earnings and global economic growth
  • The Gamechanger Consumer did not disappoint, posting historical retail sales increases driven by solid jobs growth
  • We are in a housing boom - testimony to the strength of the consumer
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2021 Global Perspectives Forecast

January 15, 2021

Executive summary

  • Entering the New Year bullish, we bid good riddance to 2020, a year marred by an epic Bear Market and global pandemic.
  • Left “tail risks” trigger furious Bear Markets with increasing frequency, and should be planned for in the investment process.
  • A “bunker buster” of monetary and fiscal stimulus kept financial markets and the economy functioning, with more on the way.
  • The Ten Fundamentals are based on the A-B-Cs... through J, and are a comprehensive outlook for the economy and markets.
  • Fundamentals drive markets, not valuations.

We enter 2021 bullish and say good riddance to 2020, a year marred by a Bear Market, a global pandemic, supply-side shocks, and economic lockdowns the world over. What we learned - or better yet, affirmed - is that when confronted by systemic shocks, it is more important than ever to “stick to the plan”. In Global Perspectives, our plan follows a strict discipline to capitalize on the insight gained primarily by evaluating advancing corporate earnings, broadening manufacturing and of course, the consumer, aka - the gamechanger.

Recall that 2019 was the best year in a decade for the markets, fueling optimism as we were entering 2020, despite the warning signs. But while optimism was high in the markets, the Fed was more somber and kept its eye on those warnings. Starting in September 2019 the credit markets – short-term lending between banks – were severely disrupted and required massive Fed cash injections. However, this ended up stoking the markets while the mounting corporate weakness was disregarded.

A few weeks into 2020 and the Bear Market hit fast-and-furious. As a famous boxer once quipped, “everyone has a plan until they get hit in the mouth.” Those with weak plans were stampeded as the crowd rushed to the exits. Investors who had a plan but didn’t follow it - in retrospect- never really had a plan to begin with. But once the “P” word (pandemic) was uttered, markets crashed and particularly notorious was the week ending March 20, 2020 when:

  • The S&P 500 dropped 15% for the week and 28% year-to-date;
  • The Bloomberg Barclays High Yield Bond Index dropped 10.1% for the week and 18.1% year-to-date;
  • Bond Market volatility reached the highest level since the Financial Crisis
  • Sellers, who were all trying to raise cash at the same time, overwhelmed the $18 trillion U.S. Treasury market, exacerbating an all-ready bad situation that froze the credit markets.
  • The Fed stepped in massively with trillions of dollars for REPO, QE and more.

Wait a minute, has this happened before? Yes. Was this the first Bear Market in a generation? No, it was the third Bear Market in 20 years. Did many “plans” factor in the possibility of a Bear Market? No. Well… why not? Because risk control is expensive, and the assumption - or hope - that the Federal Reserve will “save the day”, is much cheaper. There is a pejorative name for these Fed bailouts; it is called “moral hazard” because the expectation of bailouts causes ever more need for bailouts. Certainly, investors need a better plan than the proverbial “Fed Put”, not least because at some point the Fed will “run out of bullets”.

But in 2020, the Federal Reserve and Federal Government, by golly, did deliver – not with a bazooka – but with a “bunker buster” bomb of cash injections. To help the markets and economy recover from COVID-19 the Federal Reserve and Federal Government increased their balance sheets by $3 trillion and $4 trillion, respectively, the most in both of their histories. There is more to come, too, with another $1.5 trillion or so on deck. This is an unfathomable amount of money, and it is finding its way to Wall Street.

The bullish case is predicated on positive earnings growth in 2021 and the “bunker buster” stimulus. This potent cocktail’s impact on prices is unpredictable and positive. Most surely this triage was, and is, needed as states still have lockdowns in effect. But, if the vaccines work and America is reopened, then the markets and the economy would be awash in liquidity. High P/E ratios do not decide turning points, but they still matter and the risk of “mean reversion” is not an insignificant.

There is more though. The U.S. is currently in the most extraordinarily competitive business position it has been in for decades. Corporate taxes are at a historical low of 21%, the web of regulations have declined precipitously, and supply chains are coming back to the U.S. across all sectors including Healthcare, Industrial, and Technology. Add a phenomenal amount of infrastructure ready and able to be quickly turned back on then the seeds for fast growth have been sown. This is unequivocally bullish for the economy, jobs and the all-important consumer.

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Q4 Outlook: The Storm Before the Calm – The Sequel

October 19, 2020

Executive summary

  • A forecaster's nightmare: with no shortage of obstacles, misdirection and confusion, we dive deep in order to form a reasonable capital markets outlook
  • Context is key; the economic pendulum has swung from one extreme to the other, and appears to be swinging back again
  • The monetary and fiscal responses were the “triage needed to save the (economic) patient” but partial reopening is preventing the patient from fully healing
  • The Fed’s biggest move since the “Volker Shock”, what will be the FAIT of inflation?
  • Investors must plan for self-sustaining portfolios and not depend on Federal Bailouts

This is a forecaster's nightmare. There is no shortage of obstacles, zigs and zags, misdirection and plain old confusion that must be overcome to form a reasonable capital markets forecast over the next ten weeks. OK, now the difficult becomes impossible… or does it? We will investigate this and more in order to see through to the end of the year, but keep in mind, it is the “fundamentals that drive markets”.

Context is always important, but this is especially true when the pendulum swings from one extreme to the other. At the beginning of 2020 the United States’ longest expansion in recorded history was still, by and large, chugging along: unemployment was hovering around 50-year lows, real wage gains were accelerating in lower paying jobs, and the benefits of growth were being more widely shared. However, there were some signs that raised concern, such as manufacturing and corporate earnings growth turning negative, but by-and-large few foresaw the cataclysmic Bear Market on the horizon.

Then the pandemic reared its ugly head in mid-February and global economies shutdown like dominoes. Real GDP in the United States fell 31% in the second quarter; payrolls were slashed by 22 million; and Great Depression-like drive-up food lines were evident – scary indeed.

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