“Are the expected returns going to be lower if you’re investing today in equities?” he asked. “Sure, but you don’t want to be too early on that call of turning negative, either, because I think this can persist for another two-plus years.”
Robbie Cannon, president and CEO of Horizon Investments LLC, a Charlotte, N.C.-based investment management firm, noted his company has lightened up on its international exposure and “heavied up” on domestic equities due to the combination of tax cuts and deregulation, along with the slow pace of capital expenditures in corporate America that leaves room for upside.
“You’ll see this tailwind in relation to tax cuts, deregulation and capex spending for a little bit longer, said Cannon. “Our [domestic focus] is this idea of “New Nationalism,” or America first. If you’re investing in a global allocation framework, you have to take note of market impulses when they occur. For us, we’re excited about domestic equities. Who’s to say how much legs this trade has, but we feel it has room to run.”
Stephen Cucchiaro, president and chief investment officer at Boston-based 3EDGE Asset Management, was the most wary of the three panelists. He noted that U.S. equities have outperformed international stocks since the financial crisis by “almost historic proportions,” and ditto for growth stocks outperforming value stocks.
Elsewhere, there is an ongoing divergence in global monetary policy as major central banks around the world have mostly maintained their quantitative easing and loose monetary policies, while the U.S. central bank has steadily raised the federal funds target rate since late 2015 and shows no sign of taking its foot off the pedal.
“The catalyst for this latest downturn was the Fed chair’s comment that we’re nowhere near the end of the rate hikes,” Cucchiaro said. “These divergencies are important. It doesn’t mean that tomorrow we’ll see a big rotation from growth to value or we’ll see a big rotation from the U.S. to international. But it will happen.”
He offered that the Federal Reserve is like the world’s central bank, and that its financial tightening is taking a toll on the rest of the world. He said his firm was very bullish on emerging markets last year, but took profits early this year because it saw that financial tightening would hurt emerging markets that issue dollar-denominated debt. Higher U.S. interest rates typically strengthen the U.S. dollar, making it costlier for these countries to repay their dollar-denominated debt.
“A lot of the world is in correction phase, and the U.S. is the last holdout,” Cucchiaro said. “Will the rest of the world finally drag down the U.S., or will the U.S. pull the world up? We’re probably looking at a sideways trading range, so we think it’s time to be a bit cautious right now.”
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