CIO INSIGHTS
FO U RTH Q UARTER 2016 – I NTRO D U CTI O N
Global Political, Emotional Undertones Contributing
to Unusual Market Behavior
An unusual combination of risk-on and risk-off behavior has pervaded the
capital markets, reflecting, in part, uncertainties about the political and emotional
undertones that triggered Brexit and could steer the outcome of the U.S.
presidential election.
Last quarter, we wrote about how global
events are playing a greater role in driving
all markets and economic policies than in
the past, and how we can no longer be
U.S.-centric in our views. In particular, we
saw how Brexit (the unexpected United
Kingdom vote to leave the European Union)
roiled the markets at the end of June and
changed central bank monetary policies
and market expectations. Earlier this year
and last year, China was the focal point,
following its economic deceleration and
currency devaluations.
Brexit was different from the China-related
turmoil in that it focused global attention on
political and emotional factors—increasing
populism and anti-globalization—that are
capable of producing significant economic
and market impacts. We’re watching the
U.S. presidential election very closely to
see if the major themes that Brexit helped
spotlight—nationalism/isolationism, antiimmigration, anti-trade agreements, distrust
of career politicians, etc.—shape future U.S.
government leadership as they have in the
United Kingdom.
What do populism and anti-globalization
mean for the global economy and the
markets? In theory, they’re disruptive
and constrain growth, interfering with
free flows of intellectual and financial
capital, with possible ramifications for
corporate profits, interest rates, and relative
currency valuations.
From a nearer-term standpoint, the rising
tide of populism and anti-globalization has
helped increase uncertainty in an already
weak and vulnerable global economy.
Central banks around the world continue
providing record amounts of stimulus,
keeping interest rates at extraordinarily
low levels, which helps support equity
market expectations and valuations. The
S&P 500 Index1 reached record highs this
year while U.S. Treasury2 yields and highyield corporate3 yields declined and stayed
relatively low (see below). It’s unusual to
see U.S. stocks, Treasuries, and high-yield
corporate bonds rally simultaneously, which
is a cautionary factor in itself.
As a result of the factors and uncertainties
highlighted in this piece, this year’s
U.S. presidential election is particularly
meaningful for the markets. Our discipline
CIOs outline their market views in their
respective CIO Insights this quarter.
Unusual Market Behavior—YTD
1,200
2,200
1,000
Index Level
2,100
800
2,000
600
1,900
400
1,800
200
1,700
1,600
Dec-15 Jan-16
Feb-16
Mar-16
Apr-16
May-16
10 Yr U.S. Treasury (RHS)
S&P 500 (LHS)
Data from 12/31/2015 to 8/31/2016. Source: Bloomberg.
IN-FLY-90792 1609
©2016 American Century Proprietary Holdings, Inc. All rights reserved.
Jun-16
Jul-16
0
Aug-16
Bloomberg Barclays U.S.
Corporate High-Yield (RHS) 4
Victor Zhang
Co-Chief Investment Officer
The S&P 500® Index is composed of 500
selected common stocks most of which are listed
on the New York Stock Exchange.
1
U.S. Treasury securities are debt securities issued
by the U.S. Treasury and backed by the direct “full
faith and credit” pledge of the U.S. government.
2
High-yield corporate bonds are higher-risk,
high-yielding taxable bonds comprised of debt
instruments from corporations rated below BBB by
Standard & Poor’s.
3
The Bloomberg Barclays U.S. Corporate High-Yield
Bond Index covers the universe of U.S. fixed-rate,
non-investment grade corporate debt of issuers.
4
Yield (bps)
2,300
G. David MacEwen
Co-Chief Investment Officer
Generally, as interest rates rise, bond values
will decline. The opposite is true when
interest rates decline.
The opinions expressed are those of
G. David MacEwen and Victor Zhang
and are no guarantee of the future
performance of any American Century
Investments portfolio.
For educational use only. This information is
not intended to serve as investment advice.
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