#WellSaid

The Wellington Blog — A diverse marketplace of ideas, where our investment professionals share and challenge each other’s views. They decide independently how to draw on those ideas to sharpen their investment decisions, unconstrained by any single “house view.”

The US Federal Reserve’s (Fed’s) recent adjustments to its monetary policy framework are impactful for short-term investor returns, affirming our expectation that short-end interest rates will likely remain at or near zero for at least the foreseeable future. This brings short investors back to the dilemma many knew all too well post-2008: With most deposits and money market funds earning next to nothing in yield, how should I invest my liquid and reserve assets?

For clients’ second-tier cash bucket (reserves or excess liquidity), here are three suggestions to modestly increase income without adding significant risk.

1. Increase duration flexibility for excess reserves

Money market funds are governed by strict rules that limit the investable universe. There has also been a surge of inflows into money markets (Figure 1), further suppressing potential income from assets meeting the money market criteria. Thus, we believe expanding one’s opportunity set beyond the traditional money market rules — while still remaining on the short end — may…

MARKETS
THEMES
Caroline Casavant
Caroline Casavant
Investment Analyst
Boston
Andrew Bayerl
Andrew Bayerl
CFA, CAIA
Investment Director
Boston

The short answer is that they up and left, at least judging by the percentage of value managers (80%) that were recently underweight value stocks (Figure 1). Some observers may offer reasonable arguments for why such positioning seems justified in the current environment, but the fact is that value equity managers have traditionally tended to lean into relative valuation extremes like today’s. Instead, most are leaning away.

Figure 1

Opportunity in value stocks? 80% of value managers were recently underweight the group

Déjà vu all over again?

This calls to mind a 20-year-old quote from retired Wellington Portfolio Manager Ed Owens that is relevant again today. In January 2000, Ed opined that “value is particularly attractive now, because it has…

MARKETS
Andrew Corry
Andrew Corry
CFA
Equity Portfolio Manager
Boston

The upcoming US election is arguably the biggest near-term risk facing global markets right now. Questions continue to swirl around both the election process and the potential outcome, not to mention the looming specter of post-election controversy if it appears that President Trump has lost. The large number of mail-in ballots could mean delayed results and legal challenges, perhaps even civil unrest.

In addition, risk markets would be inclined to initially react poorly to a “blue-wave” scenario where Democrats win the White House and control both houses of Congress, which would likely pave the way for higher corporate taxes and increased government regulation. As of this writing, that looks to be a…

2020 US ELECTION
MACRO
Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

Baseball legend Yogi Berra famously remarked that “it’s tough to make predictions, especially about the future.” Political elections are no exception, of course. But as difficult as forecasting an election can be, predicting market reactions is arguably even more challenging. That being said, with the 2020 US elections only a few weeks away, now seems an opportune time to think through the various potential outcomes and their implications for fixed income and currency markets.

While most market participants are focused on the presidential election, which party controls the Senate is of equal importance in the event of a Biden victory; it matters less under a Trump presidency given that Democrats control the House of Representatives, with little chance of a flip there. Thus, the three possible outcomes to consider are…

2020 US ELECTION
MACRO
Brij Khurana
Brij Khurana
Fixed Income Portfolio Manager
Boston
Joe Marvan
Joseph Marvan
Fixed Income Portfolio Manager
Boston

With the US elections only a few weeks away and Democratic nominee Joe Biden holding onto a comfortable lead in most polls, the prospect of a so-called “blue-wave” scenario — where Democrats win the White House and seize control of both houses of Congress — looks more and more plausible with each passing day. (Granted, polls are notoriously fickle and a few weeks is an eternity in politics; anything could still happen between now and November 3.)

Many investors are wary of a blue-wave outcome, fearing it would spell bad news for the US economy and markets. But would it really? After taking a closer look…

2020 US ELECTION
MARKETS
Michael Medeiros
Michael Medeiros
CFA
Macro Strategist
Boston

While the UK equity market appears attractively valued and has the potential for a rebound, I remain neutral on UK equities for now as I believe the uncertain political outlook provides a poor basis for active risk taking. In essence, the outcome of the Brexit negotiations is hard to judge, and a non-cooperative outcome could prove highly disruptive for the UK economy and equities. In my view, this risk is not priced into the market at present.

The UK has had a poor COVID crisis

The UK’s health and economic outcomes have been in line with the worst in Europe, and managing this twin crisis will remain problematic in the near term. At the same time, the UK faces longer-term challenges, such as changes in the migration framework, a sharp rise in minimum wages and the perennial issues of low productivity growth and a large current-account deficit. Together, these near-term and structural challenges create a…

CORONAVIRUS
MARKETS
Jens Larsen headshot
Jens Larsen
PhD
Macro Strategist
London

I think the US Federal Reserve (Fed)’s newly unveiled framework for its long-run goals and monetary policy strategy, combined with its recent statements, signals a fundamental change in how the central bank will conduct monetary policy from here on.

Prior to the 2008 financial crisis, the Fed would tend to hike interest rates when the unemployment rate fell below NAIRU.1 The Fed’s latest statement made clear that this is no longer a sufficient reason to raise rates, unless accompanied by inflation exceeding its target in order to deliver a 2% average inflation rate.

A closer look at the new framework

In general, the communique was dovish in that the Fed is basically saying that it will need to see both low unemployment and above-target inflation before it will consider hiking rates. The Fed’s policy rate is likely going to be…

MACRO
Brij Khurana
Brij Khurana
Fixed Income Portfolio Manager
Boston
Climate 101 is an ongoing series designed to enhance basic understanding of climate change, including terminology and concepts, and to communicate our current research themes.

Author and financial commentator Nassim Taleb introduced the concept of black swans, rare occurrences — often macro or market shocks — viewed after the fact as obvious or bound to happen, but that were difficult to predict or prepare for. Carbon prices may be black-swan-like for their potentially substantial impact on markets coupled with a lack of collective preparation or understanding. Let’s call them green swans.

What are carbon prices and why do they matter?

Carbon prices are costs, or taxes, placed on each metric ton of CO2 produced. The objective of a carbon price — derived via regulation or the market — is to…

SUSTAINABILITY
Alan Hsu
Alan Hsu
Global Industry Analyst
Boston
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