Stocks rallied this week off of modest earnings reports and a Fed that capitulated to markets, indicating their rate hike campaign was likely near to or at it’s end. Several of the largest corporations in America reported this week, with very mixed results, but largely in line with downwardly revised expectations. The slowdown in growth both in the US and abroad was reflected in the data and in projections for this year. With much of the bad news priced in during last year’s market route, stocks seemed to have found a footing for now, and could continue on their upwards trajectory. The trade talks between the US and China will be the next major hurdle to overcome to add further optimism for investors.
Somewhat surprisingly, and potentially worrisome, has been the decline in interest rates on bonds that have accompanied the rising stock market. The Federal Reserve’s decision to not increase rates and likely slow or halt additional rate hikes moving forward, left short term rates relatively unchanged, but longer-term bonds have continued to see yield declines. This can indicate one of two scenarios: either economic growth is likely to be lower than markets had predicted or investors may already be pricing in a rate cut from the Fed sooner than expected. The former case is relatively benign, and represents a continuation of much of what we’ve seen for the last decade, while the latter would indicate a recession is closer than we think.
The Chinese trade delegation is in Washington for trade negotiations this week, hoping to stave off increased tariffs that are set to begin soon. With a slew of negative data coming out of China showing significant weaknesses, the Chinese have many reasons to push for a trade deal that can prevent further economic hardship. However, given the distance between both sides on trade policy and longer strategic objectives, there is a high probability that little more than “talk” will be executed following the meeting. A grand bargain seems unlikely, but would serve as a nice upside surprise if discussions go well.
For now, we are riding the rally higher in equities as we believe that the market has tailwinds behind it from Federal Reserve policy, lower valuations from the December selloff, and reasonable earnings results from corporate America. The end to the government shutdown also provides some relief, removing the drag from less government spending from the economy. We are looking at potentially reducing some stock exposure at this time, however, as the portfolios have drifted from their longer-term target allocations with rising stock prices. Bonds are at or near an attractive entry point, and we’ve modestly added to the fixed income positions. 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.