In stark contrast to this time last year when U.S. equity indices were approaching bear market territory (down 20%+), many U.S. equity indices are now at or very near their all-time highs. At the time of this writing (12/23/19), the major U.S. equity indices have turned in the following performance on a year-to-date basis:
One year ago, the Federal Reserve increased the federal funds (“fed funds”) rate by 25 basis points from a range of 2.0% – 2.25% to 2.25 – 2.5%. At the same time, the Federal Reserve noted in its accompanying press release that:
“The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 % objective over the medium term.” https://www.federalreserve.gov/monetarypolicy/files/monetary20181219a1.pdf
This capped off a 3-year period of gradual interest rate increases which brought the fed funds rate from 0.00% to 2.50%. As expected, U.S. equity markets did not like hearing that interest rates would likely push higher in 2019. Concerns over slowing U.S. and global economic growth and the potential for recession along with the trade dispute with China and tightening U.S. monetary policies all conspired to push equity markets markedly lower throughout the second half of 2018
– particularly in the 4th quarter.
Now, a year later and following 3 fed funds rate decreases, U.S. equity markets are poised to turn in an impressive performance for the year. They also appear to be heading into 2020 with a decent head of steam. But, we are also more than 10 years into the current U.S. equity bull market and we are still in the midst of the longest single economic expansion in our history. The length of the bull market and this period of economic growth has some investors concerned – is it possible this bull market and this impressive period of economic growth can keep going?
We believe the answer to this question is yes – at least for the foreseeable future (through mid to late 2020), barring any number of known and currently unknown economic or geopolitical uncertainties that could throw our economy or financial markets off-course. There are several reasons why we are of this mindset.
1. We do not subscribe to the theory that our period of economic expansion should or will end soon simply because it is now the longest on record. Similarly, we do not believe our current bull market will end simply because it has been around for quite a while. Rather, we believe that there must be a catalyst – a major economic or geo-political event or series of events – that would lead to a recession or a bear market. At present, we do not think such a catalyst is in place. Rather, we are in a period of low unemployment, low interest rates, slightly rising wages, strong consumer confidence, reasonable inflation, and moderate economic growth. According to The Conference Board in its December 19th press release announcing the November Leading Economic Index data:
“The U.S. LEI was unchanged in November after three consecutive monthly declines. Strength in residential construction, financial markets, and consumers’ outlook offset weakness in manufacturing and labor markets,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “While the six-month growth rate of the LEI remains slightly negative, the Index suggests that economic growth is likely to stabilize around 2% in 2020.” https://www.conference-board.org/data/bcicountry.cfm?cid=1
2. It appears the trade war with China may be deescalating given the pre-Christmas agreement between the two countries whereby the U.S. will delay the imposition of certain new tariffs and reduce some current tariffs while China will purchase more U.S. products, including farm products, and will make progress towards reducing counterfeiting and trademark and patent issues. While all the details of this agreement have yet to be worked out, this is the first
positive step in many months and suggests that a satisfactory resolution of this ongoing dispute could occur in 2020.
3. Accommodative monetary policies around the globe – including the U.S., Japan, the ECB, and China – are helping to support and encourage economic growth. Of late, global economic growth has slowed. In October 2019, for example, the International Monetary Fund noted that a downturn in global manufacturing caused, at least in part by the trade war between China and the U.S., would likely result in just a 3.0% global growth rate for 2019 – the lowest rate since the Great Recession. https://www.imf.org/en/Publications/WEO/Issues/2019/10/01/world-economic-outlook-october-2019
4. The recent UK vote which went in favor of their withdrawal from the EU suggests that the UK may be out of the EU at the end of January. But, it is also possible that additional extensions will be forthcoming and the withdrawal period could be prolonged. It also appears the withdrawal will be more, rather than less, orderly.
5. U.S. economic growth – while not spectacular has, for the most part, been fairly and predictably steady. Some economists are estimating GDP will grow about 2% in the 4th quarter of 2019. https://www.bea.gov/news/glance.
As previously noted, a number of analysts predict that U.S. GDP growth will slow to just under 2% in the coming year as outlined below. https://www.stlouisfed.org/publications/regional-economist/fourth-quarter-2019/forecasters-see-lower-gdp-growth-2020
Of course, this survey occurred before the recent trade agreement was reached. It is possible that a favorable resolution of this dispute will eventually result in more corporate capital spend¬ing as the uncertainties associated with the trade war dissipate and U.S. companies begin to feel more confident about the future. They may embark upon projects they previously shelved after the trade war began.
As we look ahead to 2020, we continue to believe the U.S. economy is solid and capable of producing a 2% growth rate. Assuming the trade war continues to wane, we also expect global economic growth will respond favorably and perk up accordingly. Of course, there is always the worry that things will not happen as planned or that an unexpected event will occur and muddy the waters. To help counterbalance these omnipresent concerns, we believe a well-diversified portfolio helps to manage risk. As always, if you have any questions or concerns about the U.S. or global economy, please reach out to your BLBB Financial Advisor.
Now that we are at the beginning of a new year, it will not be all that long before your 2019 tax forms start arriving. We wanted to remind you that if your investment account(s) transitioned to Pershing during 2019, you will receive two 1099s for each account. You will receive a 1099 from Pershing that covers the time period in 2019 when your account was custodied at Pershing and you will receive a 1099 from your prior custodian that covers the portion of 2019 when your account was custodied there. Please note that if you did not change custodians during 2019, then you will only receive one 1099 for each account. If you have any questions about this, please do not hesitate to call or email your financial advisor.