The Investment Conversation: Watching Trade and the Fed
PODCAST 07/24/2018 2018 Midyear Investment Outlook
Welcome to The Investment Conversation, Lord Abbett's ongoing podcast series.
VO: Hello, this is Will Andrews, digital media editor for Lord Abbett. What might the rest of 2018 hold for investors? To find out, we recently gathered five of our investment leaders for a roundtable discussion on the midyear outlook. Visitors to lordabbett.com can view related articles and videos at lordabbett.com/midyearoutlook.
VO: We'll start off with a preview of major themes for the second half from Robert Lee, Lord Abbett's chief investment officer:
Lee: I would say good professional investors generally do not think just in the base case, what's going to happen in the next six months. The world is nuanced and complicated. We tend to think in probabilistic, expected value scenario-based ways.
So one key thing to focus on is monetary policy. Is the Fed [U.S. Federal Reserve] ahead of the curve or behind the curve on inflation? Is it taking the punch bowl away from the party too quickly? That's one key issue.
Second key issue is fiscal policy. We had big tax law changes that affected both the individual side and the corporate side. There are open questions on the effect of all that. The first is, usually when you get fiscal stimulus, it happens during a recession or economic weakness.
But this time it's been pro-cyclical. That is to say, the labor markets are tighter. The economy is growing. It's an open question as to whether this will lead to inflation and whether the effects will be short-term and/or longer term. There's a lot to be said there. And then the third thing I would point to that's very relevant for the next six months is trade policy.
That means everything from withdrawing from the Trans-Pacific Partnership to the NAFTA negotiations to Brexit and the trade negotiations in Europe and the issues and trade negotiations between the U.S. and China. All of those I think are going to be with us over the next six months.
VO: While macroeconomic conditions have remained favorable in 2018, Lee had some words of caution:
Lee: So far we've had very contained, pretty stable inflation and inflation expectations within a pretty reasonable range. So, so far, so good.
The one thing I would add though is, investors shouldn't get complacent here. At the risk of stating the obvious, we're in an interesting place with monetary policy. We ballooned a balance sheet from less than a trillion dollars to about $4.5 trillion, and now the Fed is reducing the balance sheet. So this is an experiment that hasn't really been tested in the U.S. in a long time, maybe ever.
The same thing with Fed hikes. We've had Fed hike periods, but juxtaposed with fiscal stimulus, the tax law changes, which I think are meaningful and substantive, the combination of those two, the pro-cyclical fiscal policy plus the Fed hikes, make things an open question.
VO: That's it for this edition of The Investment Conversation. As always, you can access a full range of investment commentary and analysis at lordabbett.com. Thanks for listening.
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