A YEAR LATER NOV 2019
Nov 27,2019
What a difference a year makes. Last year at this time, the equity markets had turned lower from record highs. They were concerned about a Federal Reserve that had signaled further tightening, a slowing economy, Brexit, tariffs, trade and a slow down in corporate earnings. Throw in the fear of the consumer pulling in their purse strings going into the holiday season and the markets managed to fall close to 20% from the highs before the year came to an end.
Since then, this is how things have changed. The Federal Reserve has reversed their course. They have actually cut rates three times in 2019. This has pushed yields on Treasuries lower. In October of 2018, 2yr, 10yr and 30yr maturities were trading around 2.90%, 3.20% and 3.40% respectively. At the low this summer, these maturities yielded around 1.37, 1.43% and1.90% respectively (Barrons.com). In the late summer the yield of the 10yr treasury was actually lower than the 2yr, resulting in an inverted yield curve and concerns of it signaling a possible recession in the future.
The fear of tariffs and trade wars has subsided as I believe investors are becoming numb to the constant tweets and news articles. Consensus seems to be that the administration cannot allow the uncertainty and cost of the tariffs to flow into the 2020 elections. China appears to be experiencing an economic slowdown and a tightening of their credit markets. Their leadership is also having to contend with civil unrest in Hong Kong and would probably like to clear up their disagreements with the United States. While the markets are still exposed to the risk of news that the talks will completely breakdown, I think that most are expecting that there will be an announcement of some agreement before the years end.
I believe that these are the factors that contributed the most to the rise in equity prices for 2019. To date, the DJIA is up 20%, S&P 500 is up 25% and the Nasdaq Composite is up 30% (WSJ). The economy is growing at a nearly 2% pace, unemployment remains at a near historical low, inflation is running below the Federal Reserve’s target of 2% and corporate profits continue to grow modestly.
While all this should continue to support the equity markets, there are some items that should raise concerns about the markets. There is a risk that trade talks break down as the administration strives to negotiate from a perceived position of strength or the Chinese decide to wait until the elections are over to continue talks. The Purchasing Managers Index for both Manufacturing and Services have rolled over and entered contraction territory. The bull market has entered into its 10th year, while bull markets don’t end because of old age, I think the caution on expectations is warranted. Should interest rates begin to rise, signaling that the Federal Reserve won’t continue its path of lowering rates, it would remove one of the strongest stimulus. Rising rates should also influence a strengthening dollar which would hurt overseas corporate profits for multinational companies.
I believe that the market will be more volatile going forward. There is still an election in 12 months. There is an impeachment process that has been initiated and partisan politics has a stranglehold on Washington. Brexit, Great Britain’s withdraw from the European Union, is a threat for European Equities. Asian markets could suffer if there is no trade agreement. Remaining invested with a defensive posture seems prudent until some of these items are resolved.
Please feel free to contact me with any questions or comments.
Mike Marietti
(O) 312-781-2112
(M) 312-731-0103
The opinions expressed herein are those of Riverbend Planning Group. The data and opinions are furnished for informational purposes only and should not be considered a solicitation for an investment decision. Although it is derived from sources believed to be accurate, Riverbend Planning Group makes no guarantee to the accuracy of the information
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