In basketball, point guards are traditionally the playmakers. They run the team’s offense by setting up plays, getting the ball to the right player at the right time and controlling the tempo of the game. One could argue, especially of late, that central banks are the point guards in global financial markets. Whether it be forward guidance for more policy easing or actual interest rate cuts, central banks once again play a pivotal role in shaping the markets amid investor trepidations. Expectations that ultralow interest rates and easy monetary conditions, particularly outside of the United States, will continue, at least over the short term, are driving the rally after months of market turmoil—not signs of improvement in the economy, inflation or corporate earnings.
As the Federal Reserve (Fed) ponders when to end its extraordinary monetary support, other major central banks including the European Central Bank (ECB) and Bank of Japan (BOJ) are talking about offering more. The People’s Bank of China (PBOC) has again reduced its benchmark rates and bank reserve requirements. While China’s economy is still likely to decelerate, the potential for more monetary and targeted fiscal stimulus should mitigate the pace of the descent.
Until global economic growth picks up in earnest, we think investors will again and again turn to central banks for direction and support. Sluggish growth and lower-for-longer commodity prices for the most part have been priced in, but dependency on central bank help can create problems down the road. For one, when the Fed decides to raise rates, market overreaction and resurgence of volatility are more likely.
We have high conviction in our preference for stocks over bonds and favor a portfolio tilted toward non-U.S. equities, select credit and tax-exempt bonds. We remain cautious toward U.S. Treasuries and commodities. But while we don’t see much value in long-dated government bonds, they can help provide an effective hedge in equity-heavy portfolios.