Gary Schlossberg, Senior Economist with Wells Fargo Asset Management, provides an economic and financial market outlook for the second half of 2019.


Laurie King: I’m Laurie King, and you are listening to On the Trading Desk®. This conversation features highlights of the current economic and financial market outlook from Gary Schlossberg. Gary is a Senior Economist with Wells Fargo Asset Management. Welcome to the program, Gary.


Gary Schlossberg: Thank you. Happy to be here.


Laurie: This is your first time On the Trading Desk, Gary, so could you let our audience know a little about you and your role with Wells Fargo Asset Management?


Gary: Well, I’m part of a group of economists really charged with assessing the economic and financial market environment in which investments are made. Monitoring conditions, monitoring changes in policy, trying to evaluate them in terms of what they might mean for investments in various parts of the stock market and the bond market, as well.


Started out in Wells Fargo’s International Banking Group, transitioned over to the investment world, and I’ve been here ever since. Prior to that, worked at the Federal Reserve and the Treasury Department.


Laurie: Wow, that’s quite the background. Thank you for sharing that. Now to start off our conversation, could you speak about the state of domestic and global economic growth as we get deeper into the second half of 2019?


Gary: Well, I think the U.S. is on firmer economic footing than most economies overseas.


Our growth is driven more by domestic spending, particularly consumer spending, and a lot of that comes from services industries, which tends to be less trade sensitive than manufacturing.


By contrast, growth overseas keyed more toward foreign trade, more toward manufacturing. They felt the effects of the global economic slowdown and, more recently, worsening trade tensions, which have just simply added to the slowing in world trade growth, which historically has been an important engine for the global economy.


I might add that most recently we’ve begun to see the weakening in foreign trade and the effect that it’s had on manufacturing, even here in the U.S. and on business investment, begin to spill over to services spending, less trade sensitive areas of the economy. That could be a yellow flag for the U.S., as well. But our growth continues to lead that overseas.


Laurie: And what are your thoughts on inflation and the Fed’s 2% target for it?


Gary: Well, I think the outlook for multiple interest rate cuts by the Federal Reserve certainly have improved even in the last couple of weeks.


There was some concern over inflation beginning to percolate. Wage pressures had been developing to some extent. More recently, we’ve seen wage pressures begin to moderate a bit. Inflation is less a concern.


That, incidentally, should help drive those shorter term interest rates, which are geared very much to what the Fed’s actually doing, at some point below longer term rates. Those longer term rates have moved down a bit as inflation concerns have eased some concern over the global economy, but they’ve already been priced for some good news on monetary policy.


And so that inversion in the Treasury yield curve, we think, could begin to unwind a bit as we move forward.


Laurie: Can you talk a little bit about the shape of the yield curve? Does an inverted yield curve mean that we’re heading toward a recession or does it matter which parts of the yield curve are inverted? What is it telling you?


Gary: The yield curve inversion has had a very good track record. Historically, it’s anticipated just about every recession we’ve had. Like a lot of other indicators, there have been some false signals. When the curve inverts, that certainly is a yellow flag. You hate to say it’s different this time. We’ve been burned so often by that. But in looking at the current inversion, we are in a very unique situation.


Historically, the yield curve has inverted when interest rates have been rising. The Federal Reserve tightening up on monetary policy has driven short term rates above those on longer term maturities. In this cycle and at times—the one before this—the inversion has occurred in just the opposite situation. Inflation pressures have been easing. Interest rates actually have been moving lower, and it’s the long rates that have been moving lower more rapidly than any decline in short rates associated with interest rate cutting by the Federal Reserve.


And so in that kind of environment where rates are falling, that’s taking pressure off the interest sensitive sectors of the economy. So hopefully it’s a different signal this time around.


Laurie: Thanks for explaining that. So what do you think investors should be looking out for as we continue on through 2019, especially as it relates to the markets?


Gary: Well, the earnings outlook’s certainly important, but you know, in this kind of environment, the market is closely monitoring world trade, closely monitoring trade policy. That seems to be the most immediate and clear and present danger to the economy, certainly overseas, but even here, affecting business investment.


We’re already seeing that—manufacturing activity, as well, and the risk that it’s spills over to consumer spending. And if anything, just those trade pressures have intensified over the past couple of months.


And that kind of environment, we’ve seen investors move away from some of the riskier assets, a rotation from stocks into bonds.


In the stock market, we are seeing equity investors rotating into more defensive sectors of the market and those sectors that are more yield sensitive, like utilities, consumer staples, real estate, to some extent, and into growth stocks, as well. Those areas, high tech and the like, that are better positioned to benefit in an environment where we see economic pressure developing, their earnings tend to be a bit more resilient than those overseas.


So a more cautious environment for now until we can get better clarity on the trade outlook, better clarity on the situation overseas, and how it might spill over or might not spill over to the U.S.


Laurie: Well, before we wrap up today, do you have any final takeaways for our listeners?


Gary: Well, I think it’s a very difficult environment. We’ve seen investors’ risk tolerance really diminishing as the worry about recession continues to rise, induced by trade policy and other developments out there.


I think the big risk is in the financial markets. The distortions that we’ve managed to avoid in the economy, to some extent, have developed in the financial markets after a long period of historically low, and in some cases, artificially low interest rates. But if we can skirt that, we think it will be very much of a saucer-shaped cycle.


All that to say that investors should follow the norms of investing. Stay balanced between stocks and bonds. Within those asset classes, perhaps rotating toward more defensive, more conservative investments, depending on risk tolerance, but not pulling out entirely from one asset class or another. We found historically that that’s how you lock in losses and you start from a deeper hole as the market recovers.


Keep in mind that the longer term outlook still looks promising. There are a number of themes out there: robotics, artificial intelligence, changes that we’re seeing in the Internet. All of these things could contribute to a stronger, longer term growth rate, much as the innovations in transportation, power, and communications did late in the 19th century, early into the 20th century, giving rise to a period of very strong economic growth.


Laurie: Well, thanks for the positive outlook, reminding people about the long term. We appreciate your insights today on the current state of the economy and the markets, and we look forward to having you on the program again in the near future.


Gary: Thanks so much for having me along, Laurie.


Laurie: To get more on Gary’s economic analysis, please visit Until next time, I’m Laurie King; take care.


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