US equity markets roared to all time highs this week, with earnings and corporate guidance showing encouraging signs and the Federal Reserve adding stimulus with a much anticipated rate cut. Some of the world’s most valuable companies reported this week, with several surprising analysts with their strength, as revenues and earnings soared, pushing stock prices on the S&P 500 to records. Adding to the positive momentum, the US GDP report clocked in with stronger than expected growth on the back of consumer spending, as households continue to buy despite other weaknesses in the economy. Investment by businesses remained weak from trade uncertainty, however, falling the most since 2015. Both job growth and income growth continue to fuel consumer’s appetite to spend for now, keeping the expansion on track into it’s 10th year. Overseas the picture looks dramatically different, with the European economy registering growth of around .1%, or essentially no growth. With Germany already in recession, it remains to be seen if the European Central Banks’ new bond buying program of 20 billion Euros per month will be enough to stop the slowdown from spreading. Adding to the uncertainty, the Asian Pacific Economic Cooperation summit where the US and China were planned to meet to discuss trade has been postponed, and Chinese officials also appeared unwilling to commit to any long-lasting truce.
The Federal Reserve’s decision this week to cut rates satisfied investors, and we now must look to the future of monetary policy to determine where rates move from here. Fed chair Jerome Powell made clear they are likely done with rate cuts for the forseeable future, characterizing the recent rate cuts as “insurance” during an economic soft patch, though they remain data dependent, and will act again if necessary. It is looking more and more certain that US growth is moving back towards it’s long-term trend of 1.5%-2% growth after 2018’s artificially tax-cut inflated growth figures. Given the demographics of an aging population, low productivity growth, and troubles with immigration and trade, there remains very little in the way of structural changes to boost the economy to higher growth levels. The Federal Reserve’s toolbox is almost tapped out, and without significant boosts from fiscal policy out of Washington, few believe there are many growth drivers left.
We have strategically added to equities recently, as we believe the recent weakness in the economy may have plateaued and a turnaround could be imminent. Earnings from last quarter were reasonable, and looking forward it appears that US resiliency is alive and well. Economic growth appears to be intact with consumer spending holding up well, an encouraging sign for equity investors. While manufacturing globally remains in a trade-induced rut, stimulus from global central banks should provide a tailwind to asset prices and trickle down to the real economy. While many potential risks remain, we think a modest tilt to more risk at this time is warranted given some of the recent upbeat data. 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.