Stocks continued their climb higher this week as the trade compromise let investors breath a sigh of relief and global data appears to be making a positive turnaround. The trade deal should remove one more headwind facing the global economy, and allow business investment to accelerate as uncertainty fades. However, many expect further volatility ahead in the trade negotiations looking into 2020, though both sides have much to benefit from a truce in tariff escalations. Meanwhile, global manufacturing data looks to be bouncing off lows put in earlier this year, and housing starts this week were the highest since 2007. Solid job growth, low mortgage rates, and optimistic buyers and builders should propel the housing market higher into next year, an important indicator of future economic activity. Treasuries sold off as investors felt there was less to fear, with 10 year yields moving back closer to 2%.
The significance of the trade “deal” cannot be overstated and should have a great impact on markets moving into next year. The slowdown in trade many believe is largely to blame for the global manufacturing correction seen this year from Germany to China to the US. Not only were companies reluctant to produce goods that may not be sold under a higher tariff regime, they also put off business investment in equipment and hiring with a cloud of uncertainty hanging overhead. The cycle of lower trade leading to lower investment exacerbated an already weak global economy. While it is clear that manufacturing makes up only a small portion of the US economy, and the consumer exhibited the resiliency necessary to get us through this year’s challenges, the coming rebound in manufacturing could propel industry and international economies higher, where trade makes up a significantly greater portion of total output. A peaceful Brexit solution, while not certain, could also provide a positive tailwind to risk assets and add further confidence in the rebound. The result could be a positive backdrop for global equities moving into 2020.
We are reviewing the allocations and preparing for some updates in the coming weeks. Our focus on increasing the quality of the equity portion of the portfolios will continue as a theme into 2020, as late cycle market behavior often rewards these more “stable” companies. We are also debating the composure of our international equity exposure, and considering providing increased flexibility to the active fund managers to allocate across borders at their discretion. We believe that 2020 could be a turnaround year for some pockets overseas, as more cyclical pro-risk assets benefit from central bank easing, a more supportive trade environment, and an economic rebound. 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.