February 8 2019 Market Update

An Upswing and the State of the Economy

The drivers are many, but the theme is one of disconnect: for example, a strong fourth quarter in terms of economic growth contrasting with an expected slowing of growth in 2019;^[2] high consumer confidence for today coupled with falling confidence for the future.^[3]

In this update, we’ll give you a quick overview of the political, economic, and sentimental factors behind the volatility – and what it might mean for markets and the economy going forward.

Government Work

Despite strong economic data, including robust job growth, low unemployment, and modest inflation, the Federal Reserve stepped back from its recent rate hikes this January, choosing to leave rates as they were.^[4]

There are a number of drivers for this decision.

First, despite strong economic performance in 2018 (reaching a 3.5% annualized rate in the third quarter), there are indications that things may slow down this year. Consumer spending growth is expected to fall, and residential real estate investment – a potential signal for what’s ahead in the overall economy – has been declining. Fixed business investment and exports also both fell in the third quarter of 2018, the effects of which we could start to feel going forward.^[5]

There’s also the global context: one of the Fed’s stated reasons for pausing on new rate hikes is concern about the global economy. The recent slowdown in global growth could have an impact on the US going forward, alongside ongoing trade tensions. In response to the “less favorable outlook,” Federal Reserve Chairman Jerome Powell emphasized the Fed’s decision to proceed with patience.^[6]

What’s on the Policy Table

Those trade tensions might become important in the next month or so. Representatives of the Trump Administration are traveling to China ahead of a March 1 deadline on reaching some kind of resolution, marking the third round of negotiations.^[7]

We’ve talked about the influence of trade policy on business and economic performance before – namely, that the negotiations have already begun to influence corporate decision-making.

Finally, no discussion of January would be complete without a note about the record-breaking government shutdown.^[8] It’s estimated that the shutdown caused a permanent loss of $3 billion in economic activity.^[9] This isn’t expected to persist past January, but those negotiations are also ongoing: the next funding lapse is coming on February 15.^[10] Again, ongoing uncertainty and another shutdown could have an impact on the economy in the immediate couple of months.

What’s Ahead for Average Americans

Two other notable trends we’re keeping an eye on: consumer confidence and lending.

Consumer confidence measures fell more than expected recently after reaching an 18-year high. Expectations for the future were one source of the decline along with the short-term impact of the government shutdown.^[11]

That said, it’s important to note that recently consumer confidence and actual consumer spending haven’t tracked quite as closely as they have in past years.^[12] We’ll be watching this gauge in light of other economic data to see how things develop in the months ahead.

Finally, we’ll be looking at lending. Similar to consumer confidence, the loan market can give us some insight into what banks expect the future to look like. The Federal Reserve recently reported that a rising minority of banks are preparing for a slowdown in loans, with some banks expecting overall lending standards will tighten and loan performance to fall.

Again, for now this is a minority of banks – most haven’t significantly altered their loan terms, and there is certainly a possibility that some are adjusting them simply to reduce unnecessary risk. But one of the most common reasons for banks to rein in lending is uncertainty in the economy,^[xiii] so we’ll be monitoring this indicator to see if the trend continues.

Heading into the Rest of 2019

Obviously, no single economic or consumer indicator can tell us anything specific about what 2019 will bring – just as one “bad” month in markets isn’t necessarily predictive of what will happen the next month.

But looking at the data and trying to understand the state of the economy is useful for providing context to a portfolio’s performance and finding appropriate opportunities as they arise.

That last part is important: it’s our experience that opportunity can be found in every stage of the market cycle. The key is to stay disciplined and see the forest through the trees. Opportunism should not dictate your strategy, nor should fear about what the next month may bring.

Don’t hesitate to reach out to us if the market’s gyrations have you worried. We’ve designed your strategy with that in mind, and we’ll be glad to talk through the numbers and data with you anytime.

JSF Financial