Fall is the time of year when most investors find their way back from their summertime pursuits, roll up their sleeves and get back to work. This year finds us all with a lot of information to digest and more than a few unknowns.
Politics, both here and in the U.K., have filled much of the news cycle. The economies in Europe have been slowing, long term effects of the trade tariffs remain uncertain, and there has been a slowdown in business investment. Despite these worries, consumer spending continues to be relatively strong. All of this leads to the question: are we close to the next recession or is there still reason to be cheerful and optimistic?
US Economy
The US economy is still growing, albeit slowly. Consumer spending and full employment remain the bright spots, one supporting the other, as we continue to go about our lives. This area of the economy remains the largest factor in domestic GDP (some two thirds of the total). Our spending and consumption still constitutes a large portion of the economic pie across the developed world.
Switching focus from the individual to the business community, we get a slightly different picture. Business investments of various sorts, while still positive, aren’t as strong as they had been. Businesses are more cautious now, and the business climate continues to contain significant uncertainties.
International Relationships
Chief among the uncertainties is the continuing drama around trade policy, with the US carrying forward its tariff implementation. As you have heard before, businesses need a measure of certainty to be able to make good decisions about product development and general business plan implementation. Absent that measure of certainty, businesses simply don’t know how to execute and, therefore, tend to sit on their hands and wait for some conviction.
Looking abroad reveals additional uncertainties. The United Kingdom is dealing with the angst regarding Brexit as the latest deadline, October 31, draws near. Europe in general, and Germany in particular, are grappling with their own economic slowdown, again caused at least in part by the uncertainties around tariffs and trade policy. Over in Asia, economies are moving forward, but not nearly as fast as the folks there would like. Trade policies are the immediate cause, but China’s maturing economy and other factors are changing the metric of the region as well.
The Markets
While uncertainties around the globe continue to be debated by economists and market pundits, the market has continued to advance through 2019. Part of this significant advancement has been a bounce back from the robust decline in the fourth quarter of last year. In addition, corporate earnings in general have been supportive of higher prices.
The economic situation here in the US has remained supportive with companies posting decent growth in earnings across most of the market sectors.
Earnings growth has been positive over the last year, but markets are forward-looking creatures, and there is some uncertainty regarding how well earnings will hold up given the challenges of tariffs, trade policy and slow growth. Only time will tell of course, and, in the meantime, we can expect more volatility than normal as bulls and bears debate their positions.
Valuation
Along with expectations of earnings growth, valuation plays a key role in determining medium-term stock price appreciation. Valuations are currently very close to what we might expect given the current level of interest rates (historically low) and reasonable expectations for earnings growth going forward. Those factors—expected earnings growth and current interest rates—are the key drivers of determining the valuation level of the stock market.
Interest Rates
While on the subject of interest rates, we would be remiss not to comment on the rate situation. The low level of medium-term rates (those of the 10-year Treasury, for instance), indicates low expectations by bond buyers for future inflation and thus for economic growth. Interest rates and inflation are inextricably linked by investors. Higher rates of inflation mean that interest rates need to move higher to account for the value of money declining (in other words, investors want the same “real” return: their actual return, after inflation).
In anticipation of lower inflation, investors are accepting lower bond yields (interest rates) because their “real” return is still sufficient. The yield curve inversion we discussed in our last two letters is still with us, but the Fed’s action in lowering short term rates is reducing the magnitude of this inversion. That lowering of rates tends to be reassuring on one hand (lower rates are simulative), and disquieting on the other (the need for stimulus implies current weakness).
Summary
There is currently a mixed bag of economic and market indicators. Nervous uncertainty is prevalent with tariffs; trade uncertainty and slowing growth are contrasted with robust consumer spending; a strong service sector with historically low levels of unemployment.
While many pundits are saying the near-term probabilities for a recession have risen somewhat, they also agree that the probability of a near term recession remains well below 50%. More reliable is the likelihood of additional market volatility, down on days when recessionary fears are high, and up on the days that the news paints a more hopeful future. Indeed, we’ve seen a fair amount of that this year so far.
These are the times that make us glad to be diversified investors. Since we can’t predict the future, we cannot know just which asset class will fare best going forward. We can, however, hedge risk by holding different sorts of investments. Some of them will do best when skies are cloudy (bonds), and some will do well in fairer weather (stocks). Within those categories, we can (and do) diversify further in all sorts of ways.
Diversification won’t prevent our portfolio from losing value in times of duress, but it can reduce the magnitude of those drops. For those taking income from their portfolio, bonds help by paying dividends and acting as a more secure repository for the cash flow needed. For growth investors, diversified asset classes can hedge portfolio declines and provide for some ability to “buy low and sell high” as portfolios are rebalanced. While we have and will continue to experience volatility in our portfolios, it is important to remember that over the long term the trend has been upward.
Misc.
Seminars and Interesting Opportunities:
Women’s Worth
If you are – or know of – a woman who could benefit from some information around estate and financial planning, we hope you’ll join us at Women’s Worth, an event we’re proud to co-sponsor and co-present.
October 22, 2019 | 4:00pm – 7:00pm
Creekside Country Club
6250 Club House Dr SE, Salem OR 97306
Click here to register.
Untangling the Challenges of Aging
We’re proud to co-present at this upcoming symposium in partnership with Willamette Valley Hospice. Join us for an informative morning session on the later years of life.
November 9, 2019 | 8:00am – 12:00pm
Center for 50+
2615 Portland Rd, Salem OR 97301
Click here to register.
Seasonal Office Closures:
- November 28, 29 in observance of Thanksgiving holiday.
- December 24, 25 in observance of Christmas holiday.
- January 1, in observance of New Year’s holiday.
Thank You:
As we enter this season of gratitude, we want to thank you for your continued confidence and business. We use the term “client families” intentionally, and hope you will reach out to us with any ways we can make your life easier.
