The theme for 2019 continues, with stocks barreling higher along with safe have assets, and investors attempting to assess whether the future holds a reflationary, accelerated growth environment or a possible virus and political-driven recession. The data is very mixed at this time, with recent consumer indicators showing some slowdown, though housing permits have soared to a post-recession high. The momentum in housing markets has undoubtedly been aided by low interest rates and continued strong job growth, with neither of those factors showing signs of a change ahead. At the same time, the Coronavirus in China remains tenuous, and investors have begun to digest guidance from several global corporations forecasting a significant slowdown, as production is shut down for key consumer goods and hundreds of millions of Chinese consumers are quarantined. The downside risks have been reflected in several key markets such as oil and gold, with gold prices approaching 2013 highs and oil volatility spiking on every news report on the virus.
We remain generally positive on overall economic and financial conditions, despite the headline risks from coronavirus and the upcoming election. Manufacturing appears to be stabilizing for the most part, and we anticipate further measures from China to firm up their economy in the face of significant pressures, including potential bailouts for the hardest hit areas and industries. The Fed also provided minutes this week, where they reiterated that they see their policy as appropriate at this time, though they are ready to act should any further negative shocks disrupt the global expansion. They continue to see weak investment due to ongoing uncertainty, weighing down future expected returns. This lack of spending reduces not only current economic activity, but also the potential for future growth. Fortunately, on the consumer side, residential spending appears to be accelerating higher, and on the inflation front, the producer price index picked up moderately, though it remains under the Fed’s 2% target. Markets still are pricing in one more rate cut this year, though we are skeptical about any such moves unless a significant disruption occurs.
We continue to expect ongoing volatility from the coronavirus reports out of China, and as the US presidential election begins to heat up. If the virus were to become a serious outbreak in the rest of the developed world, undoubtedly consumer confidence would falter and a decline in economic activity would ensue. For this reason, we must keep an extremely close eye on the spread and mortality rates of the virus for signs of a bigger problem to come. We’re not making any adjustments at this time, however, as the situation appears to be stable and the backdrop remains modestly tilted to the upside in our view. 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.