Stocks were slightly lower this week, though remained near all-time highs, as a swarm of geopolitical events left investors on edge. Negotiations with China, in regular fashion, showed mixed signals, as concessions on both sides were being made all while President Trump lambasted China at the UN. Adding to the angst, global trade is on the decline, while economic signals show the slowdown is lingering, with China’s economy particularly hard-hit. The domestic economy is faring better, but consumer confidence is beginning to wane despite ongoing job creation and record levels of wealth. As we’ve mentioned before, US households are the remaining source of strength for the global economy, and will need to power through the current soft patch to avoid further pain ahead. Fortunately, the Fed has stepped in and continued to support markets through an additional rate cut, quick actions for the repo market, and ongoing guidance that they will do everything within their power to ensure the US economy remains strong. The most recent allegations about potential White House election interference with foreign powers and impeachment proceedings further weighed on markets, as increasing uncertainty prods investors to step back.
Political risks from Brexit to impeachment to trade wars has dominated headlines for most of this year, and continue to dampen investment and potential growth both in the US and abroad. In a world already starved of growth potential, these dilemmas add clouds to the outlook, with expectations coming down across the board for manufacturing growth, trade expansion, and consumption. With the troubles plaguing China in particular, the country responsible for much of the world’s GDP growth, evidence is mounting that the slowdown is very real. What we’re keeping our eyes on is the upcoming earnings season, where we expect to see revisions down to the forecasts for the coming year. Many analysts are predicting that profits could move lower than expectations, as too much optimism is baked in to current projections. However, corporate America has shown the uncanny ability to continue profit growth despite the many headwinds they’ve faced over the last decade. We believe that without a catalyst such as a robust trade deal, Brexit resolution, or positive revenues and earnings surprises, equities may remain at current positions or potentially retrench lower. While glimmers of optimism appear here and there, such as housing starts and income growth, our expectation is for more volatility ahead, though we remain positive on stocks for now.
At this time, we are not making any significant trades, as we wait for more clarity on the trade front and additional data before adding meaningfully to risk assets. The recent political storm in the US only adds to the drama, with markets unsure how to price the risks. We believe we are well positioned in fixed income markets, with short-term bonds dominating the portfolio, and our bond funds invested to potentially take advantage of rise in yields in the near term. 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.