March 15 2019 Market Update

Mixed Economic News

After the Federal Reserve indicated that it would be taking a more patient approach to future interest rate hikes, equity markets bounced upward.^[1] Stocks also rallied on hopes that trade talks between the US and China would have a positive outcome for both countries.^[2] In bond markets, we saw yields on the 10-year Treasury Bond stabilize in February, keeping to a band of 2.65% to 2.7% — the narrowest in about a year.

At the same time, the reasons behind the Fed’s more cautious approach are concerning to some analysts. Inflation measures have weakened, as have other financial indicators. The markets seem to have already priced in a slowdown in global economic growth, but risks remain that could impact 2019. In bond markets, Treasury yields have stabilized but are still relatively low, which could indicate lingering concerns about a weakening economy.^[3]

Who’s right – and for investors, does it matter?

Mixed Economic Feelings

It can be difficult to make sense of economic news in the best of times – but this is especially the case in periods where the data seem to contradict each other.

We’ve had a bit of a mixed bag of US economic data recently. Wages are growing and job growth has been strong. However, some analysts have looked to a notable drop in December retail sales and a slight uptick in unemployment claims over the past few weeks as possible indicators of a slowdown to come.^[4]

Similarly, the US trade deficit reached a 10-year high in 2018 due to higher demand for imports following a tax cut, a strong dollar, and retaliatory tariffs on US exports.[5] The 12.5% growth in the goods and services deficit is significant, though generally speaking economists are less concerned about the deficit itself than the overall picture of economic growth and consumer spending.

Lingering trade worries between the US and China, not to mention other trading partners, has driven some feelings of caution about the future direction of trade – and to the potential for weaker economic growth worldwide.

Corporate Sentiment – What’s in Store for 2019?

Corporate earnings growth rode high on tax cuts and strong economic growth in 2018. This year, it’s projected that those earnings will slow. While year-over-year revenues are expected to grow 5.2% this quarter for companies in the S&P 500, earnings are expected to decline 2.7%.^[6]

This does not necessarily spell a downturn: it could simply reflect that we’re on the “other side” of the benefits that tax cuts brought to the corporate sector.

Similarly, it’s worth noting that a major driver of demand for corporate stocks has been the corporations themselves. Share buybacks, in which a company purchases its own shares on the open market, are expected to top $700 billion in 2019, potentially matching 2018’s volume. According to NASDAQ, over 60% of cash returned by S&P 500 companies in 2018 took the form of share buybacks.^[7]

This could become an important variable should economic or business conditions weaken, as buybacks have been a strong source of support for stock prices in the past year.

Concerns and Strategies for 2019

As you take in this mixed news, you might be wondering if you should be worried.

The short answer is no. One of the overwhelming messages of mixed economic and finance news is that it’s difficult to predict exactly how things will go. Trying to reorient your investment strategy around a set of predictions based on that complicated worldview is not a reasonable way to achieve long-term wealth preservation and growth.

As we’ve noted before, we design investment strategies with both good news and bad news in mind. This hopefully makes portfolios more resilient in times of crisis and, in our experience, more successful at meeting long-term objectives.

That said, there is room for opportunistic strategies, especially in periods of uncertainty. For clients with an appropriate appetite and resource base for these types of risks, there are tactics that can be utilized to seek advantages in mixed markets and through extreme volatility.

Finally, don’t forget that the personal income tax filing deadline is coming up next month! Monday, April 15, 2019 is also the deadline for setting up and/or contributing to IRA accounts for the 2018 tax year.^[8]

As always, please reach out to us if you’d like to talk about your portfolio or if you’d like some help in meeting these important deadlines.

JSF Financial