Equity markets climbed higher this week, with the so-called Santa rally intact for this year. In a week of very light trading with many out for the holidays, little in the way of headlines caused concern for investors. Several positive data points did emerge, however, beginning with unemployment benefits falling to a three-week low, underscoring a very strong labor market and corporations hesitant to let go of employees with robust demand. Further adding to the positivity, consumer confidence hit a 9-week high, to levels not seen since the end of July. With stocks at record levels, unemployment at 60-year lows, and relatively steady wage gains, consumers look to be set to continue powering the expansion into its 11th year. Holiday sales also look to be a record, with spending bolstered by rising incomes for US households and confidence that a recession has been postponed for now.
We continue to see a positive environment for risk assets both in the US and abroad heading into next year for a myriad of reasons. Starting with the Federal Reserve, their ongoing support of the expansion through low rates and the addition of liquidity through repo markets should continue to encourage investors. Second, negative interest rates abroad provide a tailwind from foreign buyers of US corporate credit, as their negative yielding local debt still dominates many foreign markets and US yields remain relatively attractive. Their ongoing purchases of US assets keeps yields low, making equities more attractive than bonds on a risk/return basis. Adding further support, fundamentals are holding up soundly with even signs that manufacturing is turning around after this year’s mini-recession. Finally, positive trade developments could incrementally improve the business investment story which has lagged and mark a turnaround for more export-oriented economies. Despite the outpouring of good news, risks remain with elections looming in 2020 and the ever-present possibility of a trade war one tweet away.
Currently we are making no changes to the allocations, as we see light trading and a small rally likely continuing through the end of the year. We will likely be making some bigger changes in early 2020, as we readjust the allocations after this year’s windfall and prepare for a likely volatile election year ahead. We are completing a deep dive of our equity holdings to ensure that the proper exposures are in place looking forward, with careful attention to company resiliency should economic difficulties lie ahead, while also concentrating on the vast array of growth opportunities from technological innovation. While our base case does not call for a recession in the near-term, we must be prepared for downturns that can seemingly appear from nowhere. The role of fixed income in providing safety to portfolios during bouts of volatility could be weakened with yields at such current lows, so managing the bond sleeve has become more crucial in the current rate environment. 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.