October 25 2019 Market Update

Are We Really on the Brink of a Recession?

The major indexes were up slightly in the third quarter of 2019, with the S&P 500, Dow Jones Industrial Average, and Nasdaq 100 rising about 1 percent for the quarter,[1] but the amount of news and activity behind those modest numbers was significant.

The Federal Reserve reduced its benchmark rate twice, and as of this writing it’s widely expected that the Fed will choose to cut again after its October meeting.[2] Why cut rates? There is evidence of weakening in the domestic economy, sluggishness in the global economy, and continued trade tensions.

Those same factors have prompted concern among investors, with defensive sectors like utilities, REITs, and consumer staples getting a bump from rising demand for safe havens and the potential sector benefits of falling interest rates.[3]

But are things really so bad? Let’s dive into the data – and the sentiment swirling around it.

Signs of Slowing in Manufacturing and Services

The manufacturing sector is decidedly struggling. In September, the ISM US Manufacturing Purchaser’s Index fell for the second month in a row and new export orders fell as well, both to their lowest levels since 2009.[4]

Of course, manufacturing is far smaller than the services sector, which makes up the majority of the US economy.[5] However, there too we’re seeing some signs of growing weakness, with sales, new orders, and hiring slowing in September. While services is still in expansionary territory, these changes were a notable data point for market observers and were driven by concerns about the labor market, tariffs, and the overall economy. [6]

In other words, the services sector has held up well this year, but sentiment seems to be faltering, particularly in the last month. This is a variable we’d want to observe over the coming months to see if it’s a temporary drop or part of a larger trend.

What are We Seeing in Jobs?

The unemployment rate hit 3.5 percent in September, its lowest rate since December 1969, and even taking discouraged and underemployed workers into account the measure came in at 6.9 percent: a 19-year low and just shy of the all-time low of 6.8 percent.[7]

But job growth has slowed down compared to last year. Payrolls rose by 136,000, lower than the expected 145,000, and wage growth has softened to 2.9 percent for this year. [8] So far, the economy is on pace to add about 1.9 million jobs in 2019, the smallest annual gain since 2010. [9]

Making Sense of the Messages

In our view, the slowdown in jobs (and even in services growth) isn’t that surprising: after several years of strong growth and a very low unemployment rate, a slowdown in growth doesn’t seem extraordinary.

But there are two factors keeping market observers cautious.

The First is the Global Slowdown: weaker demand for products and services will tend to start driving business decisions like investment and hiring, and consumers may respond by scaling back purchases. We saw a bit of this in August, with consumer spending up but at the fairly low rate of 0.1 percent (the lowest in six months), and with companies reducing capital equipment orders.[10]

The Second is the Risk that Weakness in Manufacturing will Spread to Other Sectors – and to consumers. While manufacturing has borne the brunt of trade tensions, there is worry that it won’t stop there, and we have seen a little bit of softening in services, as noted above.

We’ve also seen some faltering in consumer confidence. A CNBC survey found that just 23 percent of Americans feel the economy will improve in the coming year, the lowest reading in three years. The survey also found that 48 percent of respondents would describe the current economy as excellent or good, down from 51 percent in May. [11]

So What’s Next?

The Federal Reserve projects that growth domestic product (GDP), a broad measure of economic output, will fall slightly in the coming years, with unemployment and inflation ticking back up.

Essentially, the Fed looks to be saying that we’ll likely see some slower growth but not the precipice of a major recession. This might seem like a fairly modest state of affairs, and even a pretty good one.

Of course, there are those who disagree, and those who point out that the Fed hasn’t always been right. The reality is that there is disagreement about what will come next.

In our view, the best thing you can do is try to look at the numbers, try to understand how they relate to each other, and try to build an investment strategy that accounts for short-term risks while also prioritizing long-term prudence.

Markets, like economies, go up and down: we avoid trying to game that system or make calls about what’s next.

For now, sentiment is mixed and concerns that we’re hitting the tail end of a record-breaking expansion are rising. We don’t believe on pinning our hopes to sentiment – whether it’s positive or negative. We believe in developing strategies designed to weather the downside, whenever it might come.

This isn’t as exciting as the news, of course, partly because it isn’t driven by the news. It’s driven by research, long-term data, and our understanding of your risk appetite and personal needs.

That said, it’s hard not to look at the news and wonder if something bad is about to happen to markets and the economy. If you’re at all concerned, please don’t hesitate to give us a call. We’re happy to talk through the data and through what relationship they might have to your portfolio.

We’re happy to talk through the data and through what relationship they might have to your portfolio.

But whatever your feelings about the news, please don’t forget to call and schedule your annual year-end meeting! It’s hard to believe 2019 is coming to a close, but now that we’re here we’d love to see you, check in, and get ready for 2020.

In the meantime, we’re wishing you a safe and happy Halloween!

JSF Financial