[sonaar_audioplayer albums=”1280″][/sonaar_audioplayer]
What Did We See?
- The US equity markets continued to rally through April.
- The prospect for a China/U.S. trade deal, returning Chinese growth and accommodative central banks provided the backdrop.
- Further fueling the rally was a good start to Q1 earnings reporting season.
- Emerging Markets were positive but not as strong as the rest of the world.
- Japan had the worst returns with the UK doing slightly better but both were still positive.
Where Do We Stand?
- We are starting to see more of the typical later cycle dynamics play out in global economies.
- We continue to monitor this recession story very closely but don’t believe one is imminent.
- As we head into the summer we likely will look to de-risk our client portfolios.
- The Fed will continue to remain patient but could alter their stance as the environment dictates.
- We continue to rebalance your accounts accordingly as well.
After a very strong first quarter, equity assets around the world continued to rally in April. The “three horsemen” of the rally of 2019 (China / U.S. trade deal, a return of Chinese growth and accommodative central banks) continued to provide the necessary backdrop for the “melt-up” in equity assets we have experienced. Further helping the equity market’s situation was a strong start to first quarter earnings reports. Coming into earnings season, the expectations for corporate profits had been revised lower, making a stream of earnings beats more possible. This helped push optimism in the markets driving the S&P 500 to all time highs by the end of the month.
We find ourselves asking, does this equity market have anything left to give?
The US
After fears of a recession in January and February abated, the US equity market has been on a tear. From the beginning of the year through the end of August the S&P 500 has returned almost 18%. That is an astonishing pace for a market that averages high single digit annual returns over time. The question to me is not when or if the market will pause. The question on my mind is will the next phase be a pause that refreshes or a pause that lingers.
To wit, there certainly has been a lot of positives from an economic standpoint. The March labor report exceeded expectations. Payroll gains also were higher than expected while wage growth grew at a high enough rate to support our current consumption levels. Importantly, the level of wage growth was also not so high that it stoked fears of inflation pressures. One could say it was a “goldilocks” wage growth level. Meanwhile, the PMI’s (Purchasing Manager’s Indexes) showed continued growth in the economy, albeit at a lower pace than previous months. The PMI indexes are predicting an economy that is growing at (or slightly above) trend and certainly not one heading into a recession. To damper excitement a bit, the Q1 GDP report, while strong, did show some rising inventories which tend to oftentimes drive down future GDP growth. As well, the fiscal stimulus from the beginning of the year is now a fading tailwind.
China
China’s PMI levels have improved from January’s lows but fell back from March’s levels. The country’s recent fiscal and monetary stimulus are making their way into the real economy but not without some volatility. China’s GDP grew 6.4% in Q1 which was the same rate we saw in Q4. However, monetary conditions have improved and retail sales have moved slightly higher. The country is also seeing a surge in credit growth that will only improve the overall economy should a trade deal between the U.S. and China come to fruition. Due to the trade war, imports in China were down 7.6% in March and are not expected to improve until tariffs are lifted. This would help drive a further broader economic recovery in the region.
Emerging Markets
The emerging markets regions have also seen several challenges that likely won’t change soon. Activity in the larger emerging countries have yet to pick up while the PMI’s in the region are still signaling continued weakness and a lack of growth. Much of this is tied to recent increases in the cost of crude oil. From December’s low of $42.53 to the end of April’s $63.91, WTI Crude has seen about a 50% increase in price. Shocks like that can effect smaller emerging economies very harshly as they are dependent on oil imports to drive their economies. Countries like Turkey and Argentina have felt the effect the most, driving economic instability in those countries. Further exasperating the issue for these countries, the U.S. Dollar has remained strong which provides an additional headwind to their economies.
Europe
Manufacturing continues to struggle in Europe, however that weakness has yet to show up in the labor markets. The ECB left interest rates unchanged as expected while signaling that rates will likely remain at these levels through 2019. Meanwhile, the UK is still struggling with Brexit but did receive an extension until October 31. This removed the likelihood of a “no-deal exit” which was a net positive for their situation. Surprisingly, the data out of the UK was better than expected with manufacturing and retail sales all doing well. The UK is also seeing the lowest level of unemployment since 1975 with strong wage growth.
Where do we stand at Shorepine Wealth Management?
The backdrop for the US consumer remains strong and the economy is likely at a low level of risk for recession right now. As we have mentioned several times before, the US is firmly in the latter part of the economic cycle and exhibiting much of the typical behaviors one would expect. Late cycle economies will typically show slowing growth, tightening credit, earnings pressures, growing inventories and eventually a stalling of sales growth. While we have not seen all of these factors yet, there is enough evidence to suggest we are heading down this more typical path. Labor markets are getting tighter, profit margins are becoming challenged, the yield curve has gotten flatter while earnings growth has begun to decelerate. This all does not mean a recession is imminent. It just means the business cycle has matured.
My lack of conviction on an “imminent” recession makes it very difficult to rely on asset class expected returns over the short term. One can always expect a late-cycle environment to be more volatile and less favorable from a risk-return profile. However, just as unpredictable are the “melt-ups” we likely experienced this year. Long term damage can be done to an investor’s portfolio by being out of a good market as much as it can by being in a bad one. Trying to time these things is a fool’s errand but as we have stated in our last few updates, we are looking to slightly de-risk our client’s portfolios as we head into the summer months. Nobody has ever gotten hurt by taking outsized winnings off the table when the market hands you a gift.
If you have any questions or have experienced any changes in your financial situation please do not hesitate to contact me.
We appreciate your being a part of the Shorepine Wealth Management family and wish you all the best!
Investment Products are Not FDIC Insured. No Bank Guarantee. May Lose Value. Investing involves risk. All written content on this website is for information purposes only. Opinions expressed herein are solely those of Shorepine Wealth Management, unless otherwise specifically cited. This is neither a solicitation of offers to buy securities nor an offer to sell securities. Past performance is no guarantee of future results. Material shown here is believed to be from reliable sources however, no representations are made by our firm as to another parties’ accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. Shorepine Wealth Management, LLC is a registered investment adviser offering advisory services in the State of California and in other jurisdictions where exempted or registered.
