2019 Market Update

March 11, 2019 12:45 pm

Betsey A. Purinton, CFP®

Managing Partner & CIO

We thought we would bring you up to date on our outlook for the markets. While December unnerved many investors, the beginning of 2019 brought renewed confidence. Since the beginning of March, however, equity markets have started to roll over. Why might this downturn be happening and where could the markets be headed?

Where we are not worried:

  1. The markets dramatically oversold in December and then rebounded with similar speed. Neither the disconcerting sell-off nor the enthusiastic rally was probably warranted, which means the recent downturn is unlikely to be a major concern. Prices could fall again – perhaps to some point between the December 24th low and the March 3rd recent high. Alternatively, the markets could become choppy – moving sideways as volatility’s up and down movements are compressed. Without deep economic concerns, however, we continue to believe that any downside volatility will primarily be short-term noise.
  2. Ned Davis Research says fund managers, margin buyers and hedge funds have been slow to embrace the rally. They could be waiting for a pullback to buy in, which would temper any sell-off.
  3. The underlying economy is decent, although growth is decelerating as the tax and spending stimulus of 2018 fades. The labor markets are strong, inflation is low, and the Fed has reasserted a dovish stance – declaring a temporary moratorium on interest rate increases. That takes the risk of a Fed misstep off the table for now and allows the economy to gain momentum.
  4. Predictions of a recession in the next twelve months are low. When markets correct or experience a bear market during a non-recessionary period, they usually rebound faster than during a sustained downturn in the economy.

What we are watching:

The global slowdown. While the US doesn’t usually import recessions from abroad, our economic growth can be impacted by a slowdown overseas. Global economic production and growth figures are still quite weak. Tack on the Brexit conundrum and unresolved trade tensions with China, and there is enough uncertainty to put business leaders on hold in terms of their capital spending. This leads to earnings concerns amongst investors. Analysts are more optimistic, with some saying the rest of the world should show signs of recovery the second half of the year, which could spill over to US markets.  However, enthusiasm is tempered and influenced by three caveats:

The dollar: If the US economy weakens and we see stronger growth elsewhere, the dollar will likely fall. That is actually good news, since a weaker dollar helps businesses export their goods overseas and increases the affordability of debt denominated in dollars. However, if the US continues to be the best economy, then the dollar will likely get stronger, putting downward pressure on economies both here and abroad. We will be following the currency markets closely.

The yield curve: economists like to say that recessions are almost always preceded by inversions of the yield curve.   That happens when short term interest rates are higher than long term interest rates. This usually occurs when the Federal Reserve is raising rates (as they have done 9 times since December 2015) and long-term bond holders are becoming more pessimistic about the economy. Since, the Federal Reserve has pressed the pause button on raising rates, a sustained inverted yield curve is unlikely in the near future. We will be watching for any signs that the Fed feels the need to become hawkish again, a move that could spark a meaningful sell-off in equity markets.

Politics: we have traditionally believed that politics is not a big factor in market moves beyond headline risk. But politics – here and abroad – is dominating the news and can impact business and consumer confidence. Since economic growth is based on consumer and business spending, we are keeping an eye on what happens in Washington DC, London, and Beijing along with other nations’ capitals for political action that could spill over into the economy and influence investor thinking.

So what does this mean for the markets? We would like to believe it means more uncertainty without the need to panic.  On the one hand, we feel the current economic recovery could possibly last a few more years. At the same time, we recognize that the next recession is on the horizon, we just aren’t sure when.

In the midst of all of this, we will be keeping a close eye on the factors that provide us with the data we need to guide your portfolios through these times of uncertainty.

 

 

 

Betsey A. Purinton, CFP® is Managing Partner and Chief Investment Officer at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at bpurinton@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Betsey’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.