INSIGHTS FROM FIRST FOUNDATION

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The Week Ahead – Tug O’ War

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

The first quarter of 2019 will go down as the best quarter for the S&P 500 index since 2009, when we were exiting the Great Financial Recession (but still worried about a double dip!). This is a strong contrast to last year’s fourth quarter, where we briefly saw a bear market. This quarter also saw the 3-month and 10-year Treasury yield curve invert, sending recession flags and fears over a few days of trading. What caused this brief volatility? Thank the Fed for bringing back out the punch bowl after being overly hawkish late last year. The Fed is stuck in a difficult role, being too hawkish (either with comments, rate hikes, or balance sheet reduction) sends signals to investors that the economic environment is running hot and needs to be cooled down, indicating that recession is coming sooner. On the flipside, being too dovish (either with comments, rate cuts, and ending balance sheet reduction) sends signals to investors that maybe the economy isn’t as strong as it should be, and that recession is coming sooner!

What is clear is that recession doesn’t occur overnight if the yield curve does invert (yet it seems that it gets traded by investors as such). The reality is that recession risk is at its highest when there is maximum bullishness across the board and there’s plenty of excess capital within the system. Central banks tried to get ahead of that last year, with 56% of global central banks raising rates in 2018 and the monetary base globally contracted by 8%. Liquidity is fuel for risk assets and central banks have reversed their language early this year or have actively begun easing (note: the People’s Republic of China pumped in a record $83 billion in one day just this January!). What we’ll see for the rest of 2019 is a continued tug o’ war between macro factors: Central banks easing and U.S.-China trade war resolution driving risk assets higher while yield curve fears and potential earnings slowdown driving risk assets lower (coming down from the tax cut sugar high).

Inversion to recession chart

The week ahead will be highlighted by Friday’s jobs report. Initial jobless claims have been trending lower which is consistent with tight labor market conditions. Current consensus expectations is for the unemployment report to stay at 3.8% as strong job gains will be offset by more workers reentering the labor market looking for employment. Last month’s wage growth of 3.4% year-over-year should hold steady and average hourly hours worked should tick back up now that winter has passed.

Data deck for March 30-April 5:

Date

Indicator

Period

April 1

Advance Retail Sales

February

April 1

Construction Spending

February

April 1

ISM Manufacturing

March

April 2

Durable Goods Orders (Preliminary)

February

April 2

Total Vehicle Sales

March

April 3

ADP Employment

March

April 3

ISM Non-Manufacturing

March

April 4

Initial Jobless Claims

----

April 5

Jobs Report

March

April 5

Consumer Credit

February

 
    

IMPORTANT DISCLOSURE INFORMATION    

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by First Foundation Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from First Foundation Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. First Foundation Advisors is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the First Foundation Advisors’ current written disclosure statement discussing our advisory services and fees is available for review upon request. Please Note: First Foundation Advisors does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to First Foundation Advisors’ web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Andrew Chan, CAIA, Portfolio Strategist
About the Author
Andrew Chan, CAIA, Portfolio Strategist
Mr. Chan serves on the investment team and is responsible for conducting investment manager research and portfolio construction. As a member of the investment committee, he provides market commentary and investment insights. Mr. Chan’s responsibilities include overseeing client portfolios, calculating risk metrics, conducting the rebalancing of client portfolios, and evaluating the selection of new investment managers. With over 10 years of wealth management experience, Mr. Chan has played key roles across various aspects of investment and wealth management. Prior to joining First Foundation Advisors, Mr. Chan was most recently a portfolio manager at U.S. Trust where, in addition to his daily responsibilities, he served on numerous internal committees including the investment manager committee, the portfolio model committee, and the strategic technology committee. He also served on the in-house strategic consultant committee reporting directly to the President of U.S. Trust. Mr. Chan is a graduate of the Wharton School Executive Program on Investment Management and holds a Bachelor of Arts degree in Business Administration from the University of California, Riverside. He is a Chartered Alternative Investment Analyst (CAIA). Mr. Chan serves on the executive board for CAIA Los Angeles and is the Interim President for the association. Read more
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