May was a challenging month for investors as trade-related fears weighed on the global economic outlook. The S&P 500 dropped 6.4% whilst investment grade bonds (Bloomberg US Agg. Bond +1.8%) benefited over the period. As we turn the calendar to June, our newsletter covers the Three Developments to Watch in the Second Half from Lord Abbett, a potential US/UK trade deal, and the latest monthly commentary from Pacific Asset Management.
Three Developments to Watch in the Second Half
Below is a summary of the midyear round-table where Lord Abbett’s experts tackle inflation, the housing market, and consumer debt levels—and their potential market impact in the second half of 2019. Click the link below to view the entire round-table conversation:
- Inflation Expectations
- There are now signs of wage growth acceleration which is an element of the U.S. economic expansion that was lagging.
- And whereas this wage growth acceleration could pose an inflationary threat, it’s not doing so, because simultaneously productivity’s picking up at the same time, and so production costs aren’t going up, even though wages are.
- However, if the central bank engages in inflation targeting in the second half (viewed as unlikely), that would be a significant volatility driver.
- U.S. Housing Sector
- Single-family housing has only recovered about 60% of the average level of housing starts from the 1990’s-2000’s. This is weak in part because there’s been a shift in consumer preferences towards multi-family units and towards renting rather than owning.
- However, single-family housing has started to pick up recently and that’s another thing that is unusual for a late-cycle environment.
- Typically, housing is weakening in the latter phases of a business expansion. And if it’s starting to strengthen now, it’s another factor that could sustain growth.
- Debt Levels
- The consumer is deleveraging. Mortgage debt is significantly down. And if you look at debt-to-income [ratios] of households, that’s declined to very low levels.
- The public sector is where debt is increasing. Right now, clearly though, investors are not worried about it. If they were, we would be seeing much higher financing costs and we’re just not.
Trump Promises Huge U.K. Trade Deal, Including Health Service
In his current visit to the UK, President Donald Trump promised the U.S. and U.K. could as much as triple their trade after Brexit, but stirred controversy by hinting that Britain’s government-run health system could be opened to American companies.
For more information on this topic, please read the following Bloomberg article:
Our partners at Pacific Asset Management share their latest Market Commentary. Please click the link below to read the latest monthly commentary: