Library

Equity Volatility Returns

The Dow Jones Industrial Average suffered two declines of over 1000 points in early February as inflation fears led to a spike in market volatility. This marked the first correction (a decline of at least 10% from a recent high) for US equities in over two years.

While the selloff had wiped out year-to-date gains, equities bounced back over the rest of the month and are up for the year through February.

Our Perspective
We expect inflation pressures to continue building and for volatility to remain higher this year than last. However, we still see few signs of excesses or extreme speculation that would indicate an imminent recession and would view any short-term market dislocations as buying opportunities.

Corporate Earnings Surprise

With the vast majority of US companies having now reported fourth quarter earnings, the results have been massively positive. Over 70% of S&P 500 companies have reported earnings above expectations, and nearly 80% have reported sales above expectations.

If the current pace holds, last quarter will mark the highest percentage of companies beating sales expectations since FactSet began tracking the metric in 2008.

Our Perspective
The synchronized global expansion is aiding corporate profitability and underpinning strong equity market performance. Fiscal stimulus from tax reform and the new federal government budget may provide additional earnings tailwinds through the rest of the year.

Reforming Drug Pricing

The Council of Economic Advisors (CEA) published a report on potential reforms to the US pharmaceutical industry. The CEA aims to reduce drug prices and raise incentives for innovation. Reform suggestions include changes to Medicare, Medicaid, regulation, trade policy, and more.

Our Perspective
Most of the suggestions appear to be well-informed ideas for real issues in the industry. Proposed changes to Medicare Part B could impact certain companies with exposure to that channel, but none of the reforms appear to be meaningfully negative to the drug industry as a whole.

Italy’s Critical Vote

On March 4th, the Italians go to the voting booths to elect both chambers of their new Parliament. The polls suggest that none of the parties, including the main party alliances, will achieve an absolute majority. As a result, getting a clear read on what the next government will look like remains difficult.

Equally frustrating is trying to determine what outcome would be best for the Italian economy and markets. All parties seem intent on promising a blue sky with tax cuts and higher spending.

Our Perspective
The Italian election is a key political risk for Europe this year, and we believe the market is overly complacent to the possible outcomes. If the winning coalition consists of more radical, populist parties, we could see a revisit of policy tensions between Italy and the EU, which could lead to more market volatility in the months ahead.

Our View
Economic Cycle		US is in the later stages, but few signs of excesses or extreme speculation indicative of imminent recession; internationally, position in the cycle varies by country/region
Growth		Experiencing synchronized, investment-led, self-sustaining economic growth, but expect to remain within the post-global financial crisis range of GDP growth due to demographic challenges and elevated debt levels
Inflation		Expect upward pressure on inflation as the economic cycle progresses amid tightening labor markets, building wage pressures, and the end of downward inflationary pressures brought about by the sharp decline in commodity prices
Interest Rates		Our growth outlook, inflation outlook, and governments shifting from monetary to fiscal policy supports interest rates gradually moving higher
Potential Risk Catalysts		Trade protectionism; central bank policy missteps; China’s economic transition and managed deceleration; corporate profitability; geopolitics
Valuations		Equities generally at/somewhat above what we consider fair value (particularly in the US), with select pockets of opportunity in international markets; developed market fixed income mostly overvalued, while local currency emerging market bonds are more attractive
Equities		Prefer fundamentally strong, innovative businesses with unique growth drivers that allow them to generate their own growth in a slow-growth world; select exposure to economically-sensitive names
Fixed Income		Prefer corporate bonds to government securities, primarily investment grade with select high yield exposure; given the recent rise in US Treasury yields, we generally recommend a portfolio duration that is essentially in line with the broad market

Indicates change

Source: FactSet and Yardeni Research, Inc. Analysis: Manning & Napier Advisors, LLC (Manning & Napier).

Manning & Napier is governed under the Securities and Exchange Commission as an Investment Advisor under the Investment Advisers Act of 1940.

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

This newsletter may contain factual business information concerning Manning & Napier, Inc. and is not intended for the use of investors or potential investors in Manning & Napier, Inc. It is not an offer to sell securities and it is not soliciting an offer to buy any securities of Manning & Napier, Inc.