2019/09/06 00:00:00

The first half of this year delivered a return of +16.2% for the MSCI ACTR index (+12.2% in the first quarter and +3.6% in the second quarter). This is more than double the long term compounded annual return for the index. Whilst investors are grateful for this excellent result, they may wonder whether it signals complacency and an overheated market, especially against the backdrop of two fundamental issues of concern to many - US yield curve inversion and the Federal Reserve seemingly close to start cutting their target rate. These events traditionally precede the next respective recessions and are perceived to damage investor confidence.
We commented in our March 2019 fact sheet on S&P 500 historic returns following the US 2/10 year yield curve events. The overall conclusion was that returns generally continued on a positive track, with just a few exceptions. It is also worth making the point that this particular fundamental curve has not yet inverted and is currently actually steepening. The more tactical 3 month / 10 year curve has inverted recently, but is also steepening slightly again.
A study of S&P 500 returns following the past seven initial Federal Reserve rate cuts (since 1984) of the subsequent six and twelve month periods show a median return of +8% and +14% respectively. Five of the seven cycles delivered positive returns over those periods. The two negatives ones were those following the burst of the technology bubble and the credit crisis era, both with real and financial imbalances in the economy with high specific risks.
Investors have to take serious cognisance of all the warning signals in the capital markets, but have to equally be careful not to overreact. The challenge lies clearly in having the necessary insight of the level of imbalances in the economy (if any) and the potential depth of economic contraction (if any). The possibility of a long soft landing should not be discarded.