Where do we go from here?

01 October 2019
Market Insights

Markets: After leveling off during the summer, stock performance has accelerated over the last couple of months to record highs. US stocks, as measured by the S&P 500 index, are up 29.66% YTD on a total return basis through close of business on 12/16/19. International stocks, represented by the MSCI EAFE Index, are up 21.66% over the same period. Even bonds have had a tremendous year on a relative basis with the Barclays US Aggregate Bond Index up over 8.5% YTD.
Economy: The US economy remains steady. Q3 Real GDP growth came in at 2.1%, which is slightly ahead of the 2.0% reading in Q2 but below the 2.9% growth rate from the third quarter of 2018. Economists expect Real GDP growth for the full 2019 calendar year to come in at 2.3%. Growth in CY 2020 is expected to decline to 1.8%. While it appears as though growth is moderating, other economic readings in the US remain very strong. The unemployment rate remains at the historic low level of 3.6%. US Homebuilder confidence jumped to the highest level since June of 1999 on the back of low interest rates and strong employment. One of the main factors driving economic growth and the markets has been the policy of the Federal Reserve. After raising interest rates four times in 2018, Jerome Powell and the Federal Reserve did an about face and cut rates three times this year. The Fed Funds target now sits at 1.50% - 1.75%, and policy makers have indicated a willingness to hold rates at the current levels through 2020 barring a significant pickup in inflation.
Headlines: The primary news story, that has seemingly moved markets daily, has been the ongoing trade negotiations between the United States and China. It was recently announced, on the eve of additional US tariffs kicking in, that the two sides have reached a “phase one” deal. Global stock markets have applauded the agreement with a steady move higher. The phase one deal means that the US will not implement another round of tariffs and will cut some of the existing tariffs that have been in place. In exchange, China has agreed to increase their purchases of US agricultural goods and other exports, in addition to granting additional intellectual property rights for US businesses operating within China. While the agreement was clearly seen as a positive first step, many of the “phase one” details are yet to be sorted out, and there remains some skepticism as to how things will play out over the long term.

Our View: While it is difficult to know where we are headed in the short run, many economists and stock market analysts believe 2020 will bring additional economic growth and market gains. At JPS Financial, we believe that a cautious stance in the current environment is prudent. As Howard Marks wrote in his 2018 book on market cycles, “we may never know where we’re going, but we better have a good idea where we are.” We don’t know what the future holds, but we do know that corporate and government debt levels are at all-time highs with no sign of retracing, the stock market is roughly 20% overvalued (based on 15 year average P/E) and the S&P 500 has averaged over 17.5% per year since the bottom of the credit crisis on March 9, 2009. While the future is never certain, we believe that it is highly unlikely that we’ll see similar market performance in the coming decade. Our theory is supported by a research report from one of the largest investment managers in the country that was released earlier this year in which they predicted that US stocks will average only 3 – 5% per year over the next 10 years. While we believe it’s important to stay committed to long term strategic goals, our analysis and efforts to determine “where we are” has led us to a more conservative outlook.

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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