Investors are relieved to see stocks move higher to start off 2019, as last year’s carnage gives way to renewed optimism from trade talks with China and a belief that the recent selloff was likely overdone. Global equities moved higher, as risk-on sentiment returned and the nod from the Federal Reserve that they were watching markets closely soothed fears of overly aggressive rate hikes this year. A perceived return of stability in oil markets provided additional support.
The government shutdown continues to add uncertainty to the economic situation, as the lack of Federal spending weighs on GDP, and the trickledown effects from government employees missed paychecks adds fury to the situation. It has been predicted that the shutdown could take a reasonable toll on US growth, and the situation needs to end sooner rather than later to avoid additional crises. Making matters worse, agencies relied upon for economic statistics remain shut as well, leaving financial markets in the dark on data used to gauge the current strength of the US economy.
On a positive note, the trade talks with China appeared to be productive, with acknowledgement on both sides of a possible truce ahead. However, similar to the G20 meeting in 2018, no concrete steps were announced nor was there an official end to threats of the planned increased tariffs ahead. Meanwhile, European signals of a slowdown continue to pour in, from a decrease in industrial production to souring consumer sentiment, while plans for the end quantitative easing are scheduled for this year. Despite the slowdown being seen globally, none of this should come as a surprise to investors, as China has been on an inevitable decline from double-digit growth, Europe’s demographic and political struggles have been known for years, and America’s stellar 2018 above-trend growth rate was unsustainable.
Now that we are back to our longer-term strategic allocations in most portfolios, we are not looking to make significant changes at this time. While we still continue to have a reasonable amount of cash on hand in case volatility flares again, for now we believe bond yields are unattractive from the recent flight to safety, and think better opportunities will emerge this year to add to fixed income exposure. If equity markets continue to move higher in a sustained way, we may trim back some stock funds to add more liquidity for expected volatility ahead. We must brace ourselves for another turbulent year, with Brexit, China negotiations, a divided US government, and significant monetary policy decisions ahead. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate.