On the eve of Christmas 2019 and the passing of another decade, why was the stock market performance so strong this year when the economic backdrop was so soft? How can stocks perform well when the economy is so worried about many things, including slow growth? How many investment forecasters predicted this year’s strength when the 4Q selloff a year-ago almost ended the current Bull market run; or that the Fed would abandon its rate hike cycle and instead cut rates 3 times? The financial markets always provide surprises which no one can time.
The US economy is soft and many others around the globe are contracting due to lingering tariff issues between the US and China. Since the first threat of tariffs announced in January 2018, at which time the markets “shook” lower, each additional threat seemed to escalate anxiety and provoke the stock market to lower values. Their prolonged threat lowered US and global economic growth prospects because business leaders are stymied to make long term business decisions involving investments into plant and equipment, and/or hiring new employees. Making things worse, the Fed raised interest rates during 2018, appearing unaware or unconcerned that those actions would also slow economic growth prospects. That adds to “double trouble” for investors. “Quick, call the fire department.”
On the heels of a September which was generally attractive, the markets entered October again looking spooky. In fact, like a year ago where the high for the year was observed on September 21, the S&P500 was off almost 4% between September 20 and October 2. That could be eerie for anyone paying close attention. In recent weeks, the US economic picture seems to be getting increasingly muddied by the sluggish international backdrop as fresh data ranging from manufacturing, services, inflation, and jobless claims all appears to be confirming a broad slowdown observable via downbeat readings coming in from abroad. Some meaningful market action reprieve arrived late last week as the US President offered a more optimistic narrative around current trade talks with China at the same time as reports of productive Brexit negotiations (a more than 2-year uncertainty at this point) we hitting the wires. Both domestic and international stocks jumped higher to end last week.
Despite persistent and worrisome headlines dominating the news flow all year, US Stocks enter the 4th quarter with their biggest YTD gains in more than two decades. In this quarter’s update, the article “September Crazy” discusses why the current bull market – which began 127 months ago and is now the longest in US history – could still advance further due to fundamentals and an anything-but-euphoric sentiment. “Big Fat Yields” (or the lack-thereof) shares several implications of low interest rates, the message from the yield curve, and the Fed’s likelihood to pursue additional cuts. The above themed titles taken together might also be a reason why the market leadership shifted abruptly in September; will we see the rotation wherein “Losers Win; Winners Lose” continue into the 4Q?
The newsletter also contains two brief Personal Finance themed notes: “Doing Diligence” and “Transitioning from a ‘Saver’ to a ‘Spender’ in Retirement” are related, but speak to the importance of discipline (be it with saving, investing, etc) as well as the emotional hurdles we observe for many individuals either at the doorsteps or in the early innings of retirement. These articles can be found posted separately.
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I carefully saved for most of my life… now you are telling me that I need to spend my retirement nest egg?
One of the most difficult transitions many individuals will face in financial life is moving from being a “person at work” (the accumulation phase where you are saving and building wealth) into someone now living off their “money at work” (the “decumulation” phase). A recent study by BlackRock Retirement Institute found that “instead of actively and systematically decumulating assets, retirees display a tendency across all wealth levels to retain assets and not spend down their initial principal.” The study also found that, “More than one third of current retirees actually grew their assets – leaving considerable potential consumption on the table.”
US stocks broke a multi-week winning streak, but did so with very “sleepy” daily moves. For the week ending September 20, the S&P500 gave up -0.5%, but remains +2.4% higher for the month. International markets also slipped, but likewise were controlled in their daily moves. Whereas the month of August was an alarmingly volatile period with 18 of the 22 trading days experiencing moves greater than ±1%, the S&P500 has closed up or down by less than 0.75% in each of the past 12 sessions – the longest such streak since the end of July. Such streaks appear common in 2019 when investors look uncertain about the direction of the global economic outlook.
Perhaps it’s just us, but we are struck with how surprised most clients are that the markets are very close to achieving full recovery of their all-time highs set in late-July. Maybe that’s because the media wasted no time in bringing focus to how adversely financial markets reacted to abrasive tweets (Trade + Fed) from the US President last month; or the reporting that the yield curve inverted – a somewhat technical concept that few mom & pop investors/savers understand beyond being told that it has a decent historical record of signaling economic recession. The overall mood can at best be described as sober.
The current global trade war concern first emerged 18 months ago; as recent as May it was generally believed a US/China trade deal could be negotiated. That deal on paper was reportedly 80% complete. At the same time, some trade progress occurred elsewhere (USMCA/NAFTA 2.0), but the US/China negotiations are unfinished and appear virtually collapsed. One even wonders if a US/China deal can resolve before the next US presidential election in 2020. The reality is China does not feel the same political urgency and is unlikely to back down quickly, instead they favor projecting a tough image. That means more economic pain will probably occur before meaningful talks resume. A major issue – Intellectual properties protection – is a complex subject to be resolved. In essence, it appears we are in the throes of a “New Cold War” with potential big influences on the domestic and global economic and financial outlook.
It was another roller-coaster ride of a week; one in which the most recent of market stress seemed to be attempting to mend. In fact, until Friday, the market was up a little more than 1% and the VIX, a widely watched measure of market volatility was beginning to appear calm. Investors appeared optimistic that Fed Chair Jay Powell would deliver a dovish and re-assuring tone during his speech in Jackson Hole, WY. In fact, most believe he delivered what the market was looking for: a conciliatory tone acknowledging that global economic conditions have continued to weaken since the late-July cut and monetary policy increasingly looks out of sync with the global situation specifically citing escalating trade friction.
If you watch the news today, it is almost certain you will learn the yield curve inverted (the 2yr/10yr spread) this morning for the first time since 2007. This will probably result in a challenging market experience today (and perhaps days ahead). You will also hear inversion – a condition where short term interest rates are higher than longer term rates – is significant because it sports a strong track record for correctly signaling that an economic recession develops at some point in the not distant future. With the curve flattening for the better part of 18 months, and some maturities first inverting earlier this year, we’ve discussed why we too believe the curve slope is relevant and worth monitoring. We do not dismiss the condition as insignificant; it signals that a policy mistake is being made and damage to the economy is building. It is evidence that monetary policy is too tight for the current economic situation as a whole and will become restrictive. The ongoing friction between the US and China over trade is part of that restrictive cocktail, and the Fed should not delay in responding further via additional rate cuts in the months ahead.