In the wake of a sharp recovery, equity market investors’ attention has been drawn to geopolitics. From the terrorist attack in Belgium, to President Barack Obama’s historic visit to Cuba, to the narrowing of the U.S. presidential field, newsworthy but largely noneconomic events have predominated. Post earnings season, without key data announcements, markets have lacked meaningful drivers and have been largely directionless, but without the turbulence that has often been seen recently.
Investors can be forgiven for pushing the pause button. In the opening five weeks of the quarter, the markets were characterized by fears of global deflation, apprehension over growth rates in the U.S. and China—and price volatility. At the time, we suggested that economic concerns were exaggerated. Indeed, reassuring consumer, manufacturing and housing trends in the U.S. and a rebound in oil prices, along with a modest increase in the renminbi’s valuation, helped ease fears and contributed to the market’s subsequent V-shaped recovery. On the monetary front, the market’s expectations for a pullback by the Federal Reserve on planned rate increases and the ECB’s easing actions reduced headwinds for risk assets and alleviated concerns about a damaging deflationary cycle.
In a sense, the relative market stability of the past week should be reassuring in the context of the global newswire. Investors have learned that geopolitical events, no matter how tragic or appalling in nature, need to be assessed in relation to economic impact. The terrible bombings in Belgium had an immediate but moderate effect on the markets. But only if such tragedies lead to meaningful changes in personal spending, business confidence and the like do they affect the broader economic picture.
A more positive narrative could be found in President Obama’s visit to Cuba—the first such visit by a sitting U.S. president since 1959. But, again, the economic significance is more tied to future developments: whether the current thaw between the two countries extends to a lifting of the U.S. embargo and the development of meaningful business relationships. Substantial disputes remain, most prominently on human rights, and we will be watching the situation with interest.
Finally, the turbulent U.S. election race is at long last narrowing, as Donald Trump and Hillary Clinton have solidified their front-runner status but continue to face rearguard competition from Ted Cruz and John Kasich, and Bernie Sanders. This is an important election, with real economic impacts for the U.S., particularly as they relate to the health care sector, infrastructure and tax policy (among other key flashpoints), as well as for our global trading partners. The unpredictable nature of this year’s process has been, to a degree, a headwind for equity markets. As the race continues to develop, and as we have a clearer sense of what the major candidates would seek to achieve in office, we may start to see market action reflecting the anticipated outcome. The situation bears watching, because, as we’ve said, fiscal policy is an important component in driving U.S. economic growth to a higher level. Monetary policy cannot alone solve the current growth problem.
More than likely, investor attention in the short term will move away from these situations as we start to see more market data that clarifies the Fed’s path on interest rates, economic growth and, ultimately, the outlook for earnings in the latter part of 2016. At that point, equities will have reason to get back into motion.
Neuberger Berman’s CIO insight column by Joseph V. Amato