Equity markets moved sharply lower this week on the back of several negative economic reports, including manufacturing data, employment, and a worsening credit outlook for US corporate debt. Ongoing political issues in the US with the impeachment inquiry and additional trade woes also weighed on investors, who moved cash to the sidelines over increasing uncertainty. Outside the US, data continues to soften further, with global manufacturing headed for or already in recession at this time, and the US factory gauge hitting a 10 year low this week. From Germany to China to the US, the trade war has taken it’s toll on manufacturers who have cut production and jobs as the tariffs increasingly cloud the outlook. Also this week, a major credit rating agency issued a warning, as deteriorating credit conditions led to the most credit rating downgrades versus upgrades since 2015. The US consumer remains the sole bright spot at this time, though even their resiliency is beginning to show signs of softness, with confidence weakening from the trade disputes.
With governments around the world seemingly unable to act in an increasingly polarized world, central banks have been relied upon for supporting the expansion into it’s 10th year. For years, policymakers have called for fiscal stimulus from governments, such as tax and labor market reforms, as well as infrastructure investment, to get the global economy moving and shift from reliance on low rates and quantitative easing from bankers to solve the world’s problems. The divisive politics from Washington to Brussels have prevented such action, now leaving the Fed and other central banks to be “pushing on a string” with their policy instruments, wondering what little left they can do to prop up growth. With rates near or below zero in much of the world, it looks as though radical steps such as additional bond purchases or direct payments from central bankers to citizens, so called “helicopter money”, may be necessary in the next downturn to spur a recovery. The single best way to restore confidence would be a cease fire in the trade war, which would hopefully increase export orders and revive the struggling manufacturing sector.
Our view for now is that the US economy will avoid a contraction, though data must be watched very closely for further signs of weakening. The Federal Reserve will do everything within it’s power to prevent a recession, using the few tools it has left, likely keeping asset prices elevated for the time being. We’re still in a relatively defensive posture, however, having significant cash holdings as well as more conservative equities in the risky sleeve of the portfolios. Bonds will continue to serve as an anchor, providing some income and stability for the models, with so much uncertainty 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.