Byron Wien is Vice Chairman of Private Wealth Solutions group where he acts as a senior adviser to both the Firm and its clients in analyzing economic, social and political trends to assess the direction of financial markets and thus help guide investment and strategic decisions.Our most recent visits are linked after the jump.
Prior to joining Blackstone, Mr. Wien was Chief Investment Strategist for Pequot Capital and before that served for 21 years as Chief (later Senior) U.S. Investment Strategist at Morgan Stanley....
From Blackstone, May 7:
...MOREWe all complain that so much is happening so fast these days it’s hard to keep up. The plethora of events that could have a negative impact on the financial markets is being ignored in the United States, however, and investors seem to be assuming that everything going on will somehow be resolved favorably.We all complain that so much is happening so fast these days it’s hard to keep up. The plethora of events that could have a negative impact on the financial markets is being ignored in the United States, however, and investors seem to be assuming that everything going on will somehow be resolved favorably. The S&P 500 index is up 15% so far this year in spite of a world-wide economic slowdown and political turmoil in the United States, the United Kingdom and almost everywhere else. To reflect on the major issues facing the markets and their possible resolution, however, is useful. In the end, I expect that earnings and interest rates will be the determining factors and that geopolitical issues will cause temporary angst but not have a lasting effect on market performance.
At the beginning of the year we anticipated that the S&P 500 would be up 15% in 2019. As the year began, the index was selling at less than 15 times earnings and investor sentiment was clearly negative. These were near-perfect conditions for, at the least, a strong market rally. Now the index is selling at 18 times trailing earnings and sentiment is optimistic, which would suggest that equities might have a more difficult time between now and year-end. If the events I discuss below don’t work out favorably, we can expect some market turbulence going forward. To start, perhaps considering a few important developments that have gone right in the last few months would be worthwhile. The Federal Reserve has decided to pause on its policy of raising interest rates and shrinking its balance sheet; the government shutdown has ended; there is some better economic news out of China, which is the primary engine of world growth; and inflation has remained low almost everywhere. There are some signs that the second half might be better for the U.S. and Europe.
So what are the issues worth a look? Here are a few: the yield curve inversion, the Affordable Care Act, Brexit, the 2020 election, friction in the Democratic Party, the Chinese threat to American competitiveness, the timing of the next recession, Federal Reserve policy this year, the direction of oil prices, European growth, the dollar, government debt at all levels, climate change and why have we had no inflation in major developed economies.
I will try to cover most of these issues while providing some analytical support for my views, but this is primarily an essay designed to express the opinions of Joe Zidle, our Chief Investment Strategist, and myself (designated by “we”) or just myself (designated by “I”). Each section is covered in a deliberately provocative way to spur you to respond mentally with your own view. The positions described are those of us in Blackstone’s strategy group and do not reflect the opinions of the firm itself. Each is covered briefly; any one of them could well be the main subject at a monthly essay in the future.
Starting with the inversion of the yield curve, the three-month yield moved briefly above the 10-year, but that is no longer the case. The 10-year yield is 2.56% and the three-month is 2.42%. The two-year yield is 2.40%, so that spread is also not inverted. Even if it were, the inversion would have to be 15 basis points over a period of ten weeks for it to provide a true bearish signal. Even if it gave a warning, we still might be as much as one to two years away from a recession, although the market would anticipate trouble sooner and react negatively. We maintain our conclusion that the next recession will occur in 2021 or later, but the S&P 500 has already achieved most of its gains for 2019.
On the Affordable Care Act, we believe it is here to stay. Legal attempts to declare it unconstitutional will fail; attempts in the Senate to roll back parts or all of it will not get traction. With all of its flaws, I believe the Act will be broadened over time and extended to more people. Recent polls show that voters are supporting an expansion of entitlement programs and the sudden popularity of the Green New Deal would suggest the country, which stood center/right at the last presidential election, is shifting to center/left. I do not believe we will move all the way to Universal Health Care and a single payment system. The cost would be too great and the insurance lobby would resist the change vigorously.
While the current Brexit situation is confusing, the drift toward a “soft” outcome is clear, but there is a strong argument on the other side. Recent polls show 50% of the U.K. population in favor of remaining in the European Union and only 42% in favor at leaving. The polls were wrong in 2016 and perhaps they are wrong now, but the situation is different. In 2016 the U.K. was growing at 2% and it is now only growing at close to 1.4%. In 2016 older, Euroskeptic people in Britain resented being subordinate to policymakers on the continent; younger people were less bothered by this issue and many didn’t vote. Today, younger people there are having trouble finding jobs. Restoring Britain to its historical glory is an irrelevant abstraction to them. Economic opportunity is much more significant. If a referendum were held today, we think the vote would be to remain. Parliament seems to recognize that, and it is drifting toward a soft Brexit. Theresa May’s willingness to involve the Labor Party in the final policy position is indicative of her intention to get a Brexit deal done by the end of October. On the continent, there is growing sympathy for a soft Brexit as a way to bolster a slowing European economy, but there are hard Brexiteers there also....
Thus far in 2019
April 25
UPDATED—Blackstone's Byron Wien: "There Is a Favorable Fundamental Background to the Markets"
March 13
Blackstone's Byron Wien reflects on his 10 Surprises of 2019.
January 3
"Byron Wien Announces Ten Surprises for 2019"
Here are the first two of his 10 surprises:
- The weakening world economy encourages the Federal Reserve to
stop raising the federal funds rate during the year. Inflation remains
subdued and the 10-year Treasury yield stays below 3.5%. The yield curve
remains positive.
- Partly because of no further rate increases by the Federal Reserve and more attractive valuations as a result of the market decline at the end of 2018, the S&P 500 gains 15% for the year. Rallies and corrections occur but improved earnings enable equities to move higher in a reasonably benign interest rate environment....
