Stocks were looking for direction this week, with little in the way of trade updates, earnings, or Brexit news to move the needle much. Earnings season is just around the corner, with some of the major banks reporting Friday, kicking off what could be a make-or-break season for equities. The volume of shares trading hands remains low, as investors wait for clarity. Many are predicting that last quarter will show a significant decline in earnings growth, if not an outright earnings recession, which the December selloff hopefully has already priced into markets. If the figures and guidance released are worse than anticipated, there could be an eruption in volatility. Hopefully analysts’ expectations will be mostly met, and the steady climb can continue. Meanwhile, the trade deal remains elusive for now, but good will on both sides appears to be stable, and the Brexit debate looks to continue on for several months to come.
The Fed’s minutes released this week showed a peek inside their March decision and provided more clarity around their message of no more rate hikes for this year. While they may have seemed resolved not to raise rates for the remainder of the year, the minutes revealed they would retain the right to be flexible as the situation evolved and essentially reinforced the idea of a data-dependent Fed for now. Markets, however, continue to price a rate cut for the first time in a decade, making it anyone’s guess who will swerve first in this precarious game of chicken. Adding to debate, the consumer price index data was released this week, showing continued weakness in inflation, providing additional reason for pause in interest rate increases for the year. Despite the increased volatility in bond markets, we continue to find value in their goal of providing capital preservation and a ballast to equities in portfolios. With inflation seemingly under control, bonds look attractive on a relative basis and offer mostly risk-free real return for the first time in a decade.
Given the already negative expectations for earnings, we continue to remain relatively defensive with our equity allocation, as we believe there may be more risk to the downside than upside at this time. A focus on quality companies that exhibit minimum volatility during market disruptions, while also increasing our allocation to active managers, puts us in what we believe is a favorable position to navigate the late-cycle behavior we’re seeing in markets. With US stocks approaching all-time highs, being prepared for a sudden onslaught of volatility seems prudent as the past several years have shown. Though a breach of the September peak could ultimately be bullish for stocks, we still think plenty of opportunity awaits for those who can be patient. Regardless, being greedy at this time could be a grave mistake.