Be Careful What You Wish For

01 April 2019
Market Insights

Markets: US stocks have continued to soar in 2019 with the S&P 500 up 15.61% YTD through June 17th. Coming off a disastrous 4th quarter, the first four months of the year represented the best Jan – April start for US stocks since 1987. US Bonds are also off to a great start to the year with the Barclays US Aggregate Bond index up 5.25% YTD. International stocks have done well but have continued to lag stocks in the US. The MSCI EAFE index is up 11% YTD.
Economy: US GDP growth bounced back with a strong 1st quarter reading of 3.1%. Analysts predict a much slower growth rate in Q2 with a consensus estimate of 1.8% growth. Analysts believe the slowing trend will continue on a calendar year basis with a CY `19 estimate of 2.4% and a CY `20 estimate of 1.9%, down from 2.9% growth in 2018. Other economic indicators, such as unemployment and housing, remain strong although the trends seem to be flattening. More recently there have been a few pieces of economic data that signal the potential for a more significant rate of deterioration. One example would be the May reading of the Empire State Manufacturing Index, which measures manufacturing activity in the New York area. That index fell to -8.6 in May from a reading of 17.8 in April. The 26.4-point drop was the largest one-month decline in the history of the index which dates back to 2001.
Headlines: Global trade tensions and Federal Reserve policy continue to dominate the headlines. While the market seems to react almost daily to the latest trade related headlines, we believe that the issues between the US and China and other major trading partners are long-term in nature and will continue to be debated for many years to come, regardless of any conversations or agreements that occur in the short-run. We remain more focused on the policy measures of the US Federal Reserve and central banks around the world. We entered 2019 with what seemed to be a strong economy and expectations for two additional rate increases from the Fed. Now, less than 6 months later, expectations have changed dramatically. Not only are we not likely to see any rate increases this year, but chances are high that we will actually see one or more rate cuts instead.

Our View: We remain cautious in the current market environment. Ultimately the stock market is forward looking. Current earnings and current economic data seem to matter less than the incremental change in those figures and whether the new data represents a surprise relative to consensus expectations. The unprecedented stimulus and easy money policies from the Fed and central banks around the world has created a murky environment that is difficult to gauge. On the one hand, the stock market and many key economic indicators have been very strong. On the other hand, we must ask ourselves, If the economy is really as strong as it appears on the surface, why has the Federal Reserve made such a dramatic shift to where markets are now expecting a rate cut to further stimulate growth? We have no doubt that Wall Street would cheer a cut in interest rates, but we also believe that these actions would only delay and potentially steepen a future downward move.

As always, we appreciate the confidence that you have placed in us as your trusted advisor and we welcome your questions or comments at any time.

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Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors on the date of publication and are subject to change. The information presented does not involve the rendering of personalized investment advice and should not be construed as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities discussed. All investment strategies have the potential for profit or loss.

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