Global equities continued their climb at record highs over the last week, as the US and China signed the phase one trade deal and earnings season kicked off with several major US banks reporting stellar results. Adding to the momentum, US retail sales for December came in as expected, and November’s numbers were revised higher. Meanwhile, inflation has not budged despite the Federal Reserve’s significant rate cuts last year and short-term bond purchases, as demographics and technology keep costs from rising. Many are starting to question how long the calm over markets can persist, with the steady climb higher raising fears of a potential major selloff ahead. Once again, it appears stimulus from the Fed and other central banks is likely the cause of the lower volatility in our view, and that short-term dips are likely in the year ahead.
We’re keeping a close eye on earnings releases over the coming weeks to evaluate how the 4th quarter shook out for corporate America, and what their leaders expect in the outlook. The banking sector showed remarkable resiliency last year, with trading revenues posting significant gains. Estimates for earnings growth this year vary dramatically on Wall Street, with some calling for robust growth, and others an outright earnings recession. As the growth driver for earnings, economic data has continued to prove resilient, driven by strong consumer demand and a thriving labor market. Housing construction and investment has seen a steady uptick along with mortgage demand, while manufacturing surveys and reports are swinging back into expansion territory after 2019’s declines. Ongoing fiscal stimulus through tax cuts as well as the potential for infrastructure spending provides additional support for the economy, though more focus should be on longer-term investments such as education and investment in research and development. The question remains, will we continue with the subpar, low, steady growth seen for much of the past decade, or could a pickup be ahead that could see accelerating earnings, higher bond yields, and a stronger economy? Our base case is unsurprisingly in the middle, as long-term trends such as an aging population, technological disruption and innovation, and low productivity counter a short-term rebound in business activity, manufacturing, and trade growth.
By now, most clients should have received notification of trades in their accounts as we have initiated a significant rebalance in portfolios. As mentioned in prior emails, we continue to have faith in the bull market with an overweight to equities and do not believe a recession is on the horizon at this time. We have increased the allocation to investment managers with flexible mandates, as we believe that the best opportunities should not be constrained by geography or investment type, particularly in the face of a fast-evolving world of trade wars, rapid technological changes, and political disruption. Additionally, in terms of risk management, we have upgraded the core of the bond portfolio across most allocations to be better positioned for any future volatility ahead. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.