|Stocks have continued on their 2019 tear higher, as positive news out of Washington on the trade front as well as a probable shutdown deal reassured investors. While for now only an extension on trade negotiations looks likely, the odds for some form of deal have risen dramatically. Meanwhile, some disturbing news on declining retail sales and unemployment continue to add to the murky outlook, while the Fed’s ongoing message on the economy is that things are looking good. Outside the US, growth is looking challenging from Europe to China, as headwinds coalesce from trade fallout and geopolitical tensions. Despite all the doom and gloom, those who have stayed invested through last year’s woes are being handsomely rewarded in the start of this year.
Recession fears do appear to be flaring again, as a slew of data points to slowing growth globally, and even within the US economy. Contradictory indicators provide a mixed bag, with employment growing rapidly, incomes moderately increasing, inflation remaining low, retail sales dropping, and consumer sentiment falling. Much of the confusion could be ascribed to seasonality effects, the shutdown’s impact on figures, and a lack of direction from Washington on trade and fiscal policies. Our view is that a recession is looking increasingly likely, however, we believe it may be one of the more moderate recessions in history. There remains no obvious excesses in asset prices or investment, given the low interest rate environment and relative strength of consumer balance sheets. While the corporate sector maintains worrisome amounts of debt, their ability to rollover and refinance at such low rates makes the burden appear sustainable. Furthermore, a recession would likely result in declines in interest rates, providing relief to corporate bond issuers. The Fed is likely still scarred from the 2008 recession to the point where they will be ultra-cautious and accommodative to prevent a similar relapse, favoring policy action to smooth over precipitous declines in the economy or financial markets. The larger question at this time is whether they have sufficient tools available to them given the historically low rates and still unprecedented size of their balance sheet. Only time will tell.
Given the potential risks and uncertainty facing markets, we are taking a slightly more cautious tone in our approach to asset allocation at this time. Most client portfolios have seen a rebalancing in the past several weeks, as we reposition to be better prepared for the expected volatility this year. We are anticipating ongoing swings in market prices, driven by late-cycle fears, increasing growth concerns, and geopolitical risks. While the Fed has likely backed off for the foreseeable future, their actions may not be enough to calm market fears. The relative attractiveness of equities has faded somewhat, as the rise of bond yields and the hesitancy on the part of the Fed makes the appeal of safe yielding assets higher than in years past. A more balanced approach of conservative fixed income investments along with higher potential equities is warranted at this time. 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.