Stocks moved modestly higher this week, despite ongoing tumult in Washington, slowing global economic growth signs, and mixed earnings results. January has been off to a solid start for 2019 in equity markets, likely driven by a repricing of risk assets since the December selloff. Looking at the data and headlines, there hasn’t been much reason to cheer in the new near, as mostly benign or slightly negative news seem to dominate. Earnings have been mostly in line with expectations thus far, however, guidance looking forward calls for a growth slowdown, which should come as no surprise to investors at this point. On a positive note, oil prices appear to have stabilized in the near term, removing one potential flashpoint for ongoing volatility, and could add to signs that growth fears are overblown.
Outside the US, Brexit continues to be hotly debated in the United Kingdom, with the EU considering options to avoid a messy disruption to trade. There still appears to be no favored outcome in the divorce, and many major UK companies are beginning to make exit plans of their own to escape the lingering uncertainty. The trade war with China has no clear resolution in sight either, with news out of Washington changing daily, and a lack of direction remaining the ongoing concern. China appears willing to make considerable concessions, laying out a plan this week to eliminate the trade deficit completely over a 5 year period. The US response has been mixed, with optimism quickly dashed by commentary from the Commerce Secretary Wilbur Ross, who claimed the US and China were “miles and miles” from resolving the situation. Markets are watching any tentative deal closely, as the slowdown in global growth will only be exacerbated by additional tariffs slated to go in to force if peace is not made. Chinese negotiators will be in Washington next week for the next round of talks, which will be on everyone’s radar to see what actions might actually be implemented.
On the fixed income side, we believe rates will continue to rise marginally, and think opportunities to add to longer dated bonds with higher yields are ahead of us. With the Federal Reserve likely to increase short term borrowing costs, and economic growth limited by demographics and productivity gains, shorter dated bonds on the front end of the yield curve appear most attractive to us at this time. In preparation for adding bond ballasts to the models, we’ve reduced some stock exposure with the recent run up, as the portfolios were slightly overweight equities entering the year. We’re continuing to favor stocks to fixed income, as we believe the bull market has more room to run this year, but we would prefer to take a more balanced approach as the cycle ages. Given the expected volatility this year, keeping an adequate amount of cash on hand seems prudent for now.