Equity prices pushed higher this week on the back of a Federal Reserve on hold and hopes that a China trade deal or postponement of tariffs is in the works. Adding to the potential positive policy news, growth appears to be moving up in the right direction from the recent dips in manufacturing activity. Though no official announcement of a trade deal has been made, chatter from Beijing and Washington indicate that a delay in the tariff hike set for December 15th is likely, however, not certain. To be clear, a breakdown in talks would have significant effects on both financial markets and the economy, as this round of tariffs would affect consumer goods heading into the holiday season and hit business confidence going into 2020. We will be closely watching for direction on where trade and markets go from here, bearing in mind that the so-called “Phase One” deal only provides a reprieve at best.
As we have discussed before, the shallowness of this recovery and lack of vigor has extended the length of this cycle and we believe there may be years to come before the next recession. Though we have experienced several slowdowns, such as the one this year in manufacturing, and many bouts of volatility, the eagerness of central banks to avoid another recession and keep financial conditions sanguine has made this bull market one for the ages. The cost for all of this support remains to be seen, but appears to be showing up mostly in inflated asset prices and an expectation of lower growth for years to come. This benefits borrowers and those with investment assets already, but harms savers and those who traditionally rely on interest for income, such as conservative retirees. Ultimately, almost all policymakers agree that monetary policy cannot fix the economic problems of the world, and that major structural changes to the global economy are necessary to lift the growth prospects for the future. These changes include significant investments in education, clean energy and infrastructure, meaningful tax reform, intelligent global trade policy, and demographic solutions such as immigration to relieve an aging workforce. Until our divided governments can begin to tackle these concerns, real growth will likely remain muted for the foreseeable future, which will have consequences for investors for years to come.
Our conviction has not changed that equities remain the best opportunity at this time, with the US likely to maintain momentum into 2020. Despite valuations looking somewhat elevated, they are not too far from historical norms, particularly when current low bond yields are taken into account. Given the positive dynamics from investor sentiment, the Fed on pause, and what looks like a manufacturing and growth turnaround in the making, we’re keeping our bullish posturing at this time. A return to trend growth as we have seen for much of the past decade is our expectation looking forward, with the so-called “goldilocks” environment of low but positive growth, low inflation, and record unemployment. Meanwhile, keeping a ballast in fixed income also rings more important than ever with higher volatility anticipated 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.