Financial markets have had their share of ups and downs in recent months amid an escalation of trade tensions, fears of a U.S. recession and geopolitical flare ups. Will recent steps taken by global central banks help to stimulate growth? Will trade continue to disrupt the expansion or will a resolution be reached? What might that mean for the economy and markets?

At BNY Mellon Wealth Management's recent events in the Pacific Northwest, Chief Investment Officer Leo Grohowski moderated a panel of policy and investment experts as they discussed these topics and more. Here's an abstract of our panelists' views on these important issues:

1. What's your outlook for the U.S. economy?

Don Rissmiller, Partner and Chief Economist for Strategas Research Partners

We are in the midst of an extended economic cycle, but persistent trade rhetoric and a global manufacturing slowdown is weighing on U.S. economic growth. The labor market and consumers remain the bright spot, with job growth solid and spending still robust, but business investment has been low.

While the trajectory of growth will depend on a combination of monetary, fiscal, spending and trade policy, we continue to expect the U.S. economy to muddle through. While disappointing compared to what could have transpired after the 2018 tax cut, slow but positive growth does not equate to a recession. Economic cycles tend to die of imbalance, not of old age, and I currently don't see that forming.

2. Why has the Fed changed course this year?

Don Rissmiller

While the Fed has maintained a generally positive outlook for the U.S. economy throughout the year, that picture has been clouded because of the U.S.-China trade conflicts and sluggishness in the economy. The Fed delivered its first quarter-point cut in over a decade at its July meeting, as an insurance cut. That was followed by another 25 basis points in September, after an inversion of the Treasury yield curve signaled the Fed was too tight.

With inflation still tame at 1.8% in August, based on the Fed's preferred core price gauge, and policy rates and 10-year yields at the highest levels in the developed world, the Fed appears to have plenty of room to ease without fear of prompting overheating. We continue to believe we are in an easing cycle, even if we see the Fed take a pause at its October meeting.

3. U.S.-China trade negotiations have taken many turns. What do you think we'll see on trade?

Don Rissmiller

President Trump's strategy is to win on as many trade agreements as possible. The U.S.-China trade “deal" that was being discussed up until May 2019 was an agreement that substantially changed trade between the two countries. Although neither side has been willing to make significant concessions, economic conditions have been weakening, which could lead to a limited deal. However, it might not be the deal that was originally discussed and hoped for.

4. How are you positioning portfolios as a result of your expectations on trade?

Sinead Colton, Head of Investment Strategy at Mellon Capital

Our central expectation is that the current administration's desire to resolve current trade tensions will increase significantly as the 2020 presidential election comes into focus early next year. Our investment outlook is cautiously conservative; we expect moderate economic growth in the U.S., and maintain a reasonable exposure to equities, albeit lower than in recent years.

5. We've been discussing Brexit for several years now and it seems like the endgame might be drawing near. What is your central case for the resolution, and how do you think markets will respond?

Sinead Colton

As the October 31 deadline draws closer, markets interpret positive news about an agreement as a boost to the pound, while the opposite drives the pound lower. Consensus on a withdrawal agreement still appears some way off, but glimmers of hope for a compromise are seen in some of PM Johnson's remarks. While the U.K. economy would suffer under a no-deal Brexit, which would hurt U.K. small cap stocks, large cap U.K. stocks should mostly benefit from the weaker pound.

6. In a market environment where return expectations are more muted, new investments that offer preferential tax treatment can be attractive to investors. Can you describe what is meant by an Opportunity Zone Fund?

Isela Rosales, Managing Director, Bridge Investment Group

The Tax Cuts and Jobs Act of 2017 created provisions intended to spur investment in specific economically challenged geographic areas by creating what have become known as Qualified Opportunity Funds (QOFs). This new tax incentive gives investors the ability to defer tax on gains from the sale of an asset if the gain is reinvested in assets located in a certified economically challenged geographic area. If the new investment is held long enough, investors may exclude portions of the gain as well.1

7. Where are you seeing opportunities within this space?

Isela Rosales

We see opportunities in multifamily residential communities, a sector Bridge has a lot of expertise in, especially in regions such as Denver, Nashville and Atlanta. Value-add real estate, where we can buy at a discount and sell after improvements, have been offering attractive opportunities and are more recession proof than other areas of the real estate market.

Summary

Leo Grohowski

Despite political and trade uncertainty, BNY Mellon Wealth Management expects the long global expansion to continue, albeit at a slower pace. While global manufacturing weakness is spilling into the U.S., the U.S. labor market and consumer remain bright spots. Still, the uncertainty of the 2020 U.S. presidential election and what it could mean for policy causes us to place a 20% probability of recession by the end of 2020.

Investors should anticipate a more muted and volatile pattern of returns at this point in the economic cycle, making the value of advice over the next three-to-five years more critical. When it comes to investing, it will be important to consider both a top-down view of where the economy and markets may be heading, as well as a bottom-up perspective when it comes to security selection. Overall, we believe investors will benefit from a globally diversified portfolio that favors domestic equities (large cap stocks, in particular), bonds for diversification and selectivity among lower-correlated strategies.

  • Footnotes

    1 IRC Section 1400Z-1 & 1400Z-2.

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