Stocks are sitting near all time highs, as positive news on the trade front and some signs of a bottoming out on negative economic data spurred a return to risk assets for investors. Also a positive signal for markets, the yield curve moved further out of inversion territory following last week’s Federal Reserve rate cut and a selloff in long term bonds. Statements out of China that tariffs would likely be removed in coming weeks boosted sentiment globally, as many blamed the trade war for the manufacturing slowdown that has plagued the growth outlook. While the terms of a deal are elusive and uncertainty remain, progress appears to have been made that could put a pause on escalations in rhetoric, providing a much-needed boost to investor sentiment going into 2020. Next year’s election season will be kicking into high gear in the coming months, and any positive news to reduce drama out of Washington is welcome.
It appears that the global economy is stabilizing from this years’ turmoil, as global policy makers have stepped up support and several geopolitical flashpoints have eased. While manufacturing and factories continue to struggle, the consumer has driven the expansion onward and should be strong enough to see us through this soft patch. Household wealth remains extremely strong, with even the savings rate showing plenty of excess capacity should consumer spending begin to weaken. Even overseas, China and Europe could be turning around, as a trade deal would reverse recent declines in activity in both markets as production ramps back up. Meanwhile, US recession indicators have declined, dropping in half from the levels seen during last December’s market route. Another major force behind the recent bullishness in the market is the Fed’s decision to increase short term bond purchases dramatically, buying billions of dollars of Treasury bills and adding significant liquidity to markets. All in all, a coordinated effort by central banks and a fortuitous break in trade has added powerful tailwinds to markets as of late. The change in sentiment has seen swift rotations in market leadership, as defensive sectors like utilities, staples, and real estate have sold off and cyclical stocks such as financials and technology have rallied higher. Longer term we are more agnostic at the sector level, but believe that higher quality companies with stable profits and balance sheets and those that overall exhibit less price volatility are likely to outperform over the next several years.
At this time, we are overweight equities in most model portfolios, as we believe upside remains ahead for stocks, both inside and outside the US. Despite this year’s slowdown, the growth scare does not look to be the end of the current bull market, and earnings continue to expand at a modest pace. Optimism around a potential cease fire in the trade war and possible Brexit deal should pull investors off the sidelines and back into risk assets. At the same time, many bonds look overpriced with yields near rock-bottom, and we believe a reversal in some of the gains this year may be ahead. To prepare for a rise in yields, we have shortened duration and repositioned the portfolio’s fixed income to reduce potential losses 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.