We’d suggest avoiding the volatility of UK markets...at least for now.

Our Top Market Takeaways for the week ending September 6, 2019.

Breaking out

Well, the first week back from summer wasn't so bad. The S&P 500 (finally) broke out of the range that it had been bouncing between, ending trading on Thursday at 2976, a +1.7% gain on the week. Bond yields across the spectrum rose (10-year yields snapped +10 bps higher on Thursday alone), adding to more optimistic sentiment. What was behind the rally? In our minds, a few things: 1) A strong ADP payrolls report suggested that the U.S. labor market is still robust; 2) the ISM non-manufacturing PMI survey (think: services) unexpectedly bounced; and 3) investment-grade corporates issued $74 billion of debt this week, the most of any week since 1972. This suggests to us that companies are taking advantage of the low interest rate environment to either expand or buy back shares. We think this suggests that corporate America is actually feelin’ pretty good.

Line chart shows S&P 500 Index trading range from May 24, 2019 to August 30, 2019. During this time period, the trading range has been volatile. As of lately, it is increasing.

While we’re hesitant to place too much emphasis on individual data releases, these three support our view that the recent “recession obsession” could be overdone. Woes in the manufacturing sector globally will likely continue to be a headwind to earnings growth, and geopolitical tensions (like the trade war between the United States and China, and Brexit) will probably put a lid on valuations. But, at least to us, the recent cries for an imminent recession seem misplaced.

Boris brings Brexit to the boil

ICYMI: The Brexit merry-go-round continues
With a new headline every hour, here’s the gist of what you need to know. This summer, Theresa May stepped down as the United Kingdom’s Prime Minister after years of painstaking political gridlock, and Boris Johnson took the helm a few weeks later. So far, Johnson has taken a hard line on his campaign promise to deliver Brexit by the October 31 deadline, “come what may.” The political stage has only grown more complicated since then. The recent announcement that Parliament will be prorogued (politicians’ code for “suspended”) until just before a Queen’s Speech (on October 14) has thrown everyone for a loop.

As of right now, the most likely outcomes seem to be: 1) a new general election (which would likely trigger an extension to Article 50, the legislation that put Brexit into motion), or 2) a no-deal exit (which seems slightly less likely, given recent moves by policymakers to block such an outcome). We’d note other paths forward are still possible, too—namely a revised Withdrawal Agreement (though unlikely), a second referendum (a.k.a. Brexit round two), or an extension that’s unrelated to either an election or a referendum (think: if both the United Kingdom and the European Union agree on an extension in order to avoid no deal)—but we place less weight on those outcomes.

So, what’s next?
Whatever it is, it’s not going to be easy.
Each outcome could be reached through a variety of paths, with many twists and turns along the way. The week that policymakers have had between Parliament’s returning from its summer recess (on September 3) and the scheduled suspension (slated for some time next week) has been crucial. Those MPs against a no-deal Brexit are currently workin’ hard to pass legislation to avoid such an outcome in the short pre-prorogation time period. And it looks like they’re pretty close to passing it.

Whether they succeed or not will have a huge influence on the five-week suspension that’s scheduled for next week and the time after up until the October 31 deadline. Sound busy enough? There’s more…At various times along the way, Boris’s government could fall as a result of any vote of no confidence (assuming one is called). There are also several different routes to a general election either before October 31 (as PM Johnson tried…and failed…to bring to the fore), or after October 31 if Brexit is postponed. Such an election could also occur both after Brexit and within this calendar year. You could also see Boris resign amid all of the hubbub, or still take action toward a no-deal exit despite any legislation put in place to block it. Basically, anything could still happen, and only time will tell…

But what about markets? A few quick words.

It looks like more of a rocky ride ahead. Since the Brexit referendum in 2016, the currency, or Sterling, has been the main avenue by which investors have expressed their views on the outcome of the Brexit process. The initial sharp fall in Sterling has been followed up by a period of significant weakness, hovering around levels last seen during the referendum. From here, the currency could swing rather dramatically depending on the outcome for Brexit. Because Sterling has taken a weaker turn the last few years, companies whose revenues are sourced from exports business abroad, but are listed within the United Kingdom, have outperformed those that have a more domestic focus.

As for what it means for the rest of the world? Not too much, at least over the long term. The Brexit process and outcome impacts the United Kingdom far more than it impacts the European Union, or other UK trading partners. Away from the United Kingdom, the euro would likely be the most affected, as investors worry about any collateral damage. There could also be some modest volatility in global markets, but this would likely dissipate given Brexit’s relatively small impact on the global economy. All in all, any global impact is likely to be short-term and sentiment-driven, while longer-term impacts will probably be insular to the United Kingdom. For those investors with a short-term investment horizon and lower risk tolerance, we’d suggest avoiding the volatility of UK markets...at least for now.

Football is back

After a 215-day drought (but who’s counting?), the much anticipated 2019–2020 NFL regular season kicked off last night. The Green Bay Packers defeated the Chicago Bears 10–3 in a defensive battle. With one down, 255 games still remain over the next 17 weeks, meaning many of us will be glued to our TVs and couches for the foreseeable future. While each team hopes they will be the last standing, current favorites to win the Super Bowl are the New England Patriots, Kansas City Chiefs, New Orleans Saints and Los Angeles Rams, according to Vegas Odds and FiveThirtyEight. So, who do you think is going to Disney World?

All market and economic data as of September 2019 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.


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