What Did We See?

• The US equity markets rallied quietly with most global markets again in November.
• Recession concerns have quickly turned into re-acceleration expectations.
• The US consumer remains healthy and on track to buoy our economy.
• The trade war phase 1 agreement continues to be worked on.
• The safe haven of bonds saw mostly negative results as the pace of rate cuts slowed around the world.

Where Do We Stand?

•  US equity market continues to make new highs in the face of rising macro-economic imbalances.
• Weak earnings growth, low interest rates and high valuations speak to a market possibly ahead of itself.
• We continue to monitor the incoming data very closely but are aware that the markets seem to remain in melt-up mode.
• De-risking of our client portfolios has remained and we will take additional defensive measures as conditions warrant.
• We continue to rebalance your accounts accordingly.

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Despite a multitude of geopolitical risks, equity markets continued to rally in November. This has been a relatively consistent theme through much of 2019 and markets are now reflecting optimism that growth will in fact soon reaccelerate. This optimism, while real, may be unfounded at worst and early at best. Appropriately, I feel an internal reluctance to these most recent moves that cannot be ignored. Most traditional measures of valuation are showing U.S. stocks to be fully or even over-valued. Meanwhile, U.S. bonds are producing some of the lowest yields in the post-war era. More than 10 years after the “great recession” we have fewer cheap stocks than a healthy market should have. The time to be careful is nigh.

Volatility Vacuum

We are also at the time in the year when expectations roll forward to the next year and all the big-time analysts begin to publish their predictions for 2020. While these predictions rarely, if ever, come true on a consistent basis it is important to help us understand where the “spirits” of the markets are trending. While the S&P 500 has recently set records, trading conditions have returned to the calm we saw during much of 2017. In fact, volatility has basically evaporated. Obviously, extreme levels of bullishness goes hand in hand with low volatility and low cash allocations. As is often the case, these actions have been supported by an intense reversal in sentiment amongst the Wall Street banks. Just a month ago we saw a myriad of headlines plastered with the word “recession”. In one short month the narrative has completely flipped all while prices have become detached from valuations and deviated from long term norms. Concerning? Yes.

The Consumer

As we prepare to enter the last month of the decade and then the last year of the U.S. Presidential cycle we are keeping a watchful eye on the U.S.consumer. Why? Because the health of the U.S. consumer is what has been keeping the global expansion going. Because an overextended consumer can spell disaster for global economies. And lastly, because the health of the economy as it relates to the optimism of consumers can dictate the results of a presidential race.

So how do we look? Consumer confidence remains high. Unemployment remains at a 50 year low. Job growth is robust enough while wage growth is solid. Consumers are in pretty good financial shape. Consumer debt relative to assets are at a multi-decades low. Debt service versus income is also at multi-decades low. Central banks around the globe are on a easing cycle and tariffs are at best, going away over the next few months. There has noticeably been no further trade war escalations and hopes of a deal have buoyed sentiment. Along with an improvement in business sentiments, I believe these factors can help soften the blow of any recession we may see in the coming months or years.

Further Abroad

Around the globe we saw some improvement as well. In the Eurozone, consumer confidence improved while the manufacturing sector saw improvement from low levels. The service sector is still moderating there however. China fared a bit worse as protests in Hong Kong continued to hinder economic growth. Along with the tariffs and ongoing trade tensions there is real concern that China (and by default much of the Emerging Markets) will continue to slow. In the UK there is an ongoing debate about providing some fiscal stimulus as the political parties there spent most of November campaigning. Brexit still remains a large distraction for much of the country with lawmakers split on the issue.

Where do we stand at Shorepine Wealth Management?

The financial media would have you believe that markets are free from risk and now is a great time to jump in. However, the truth is that periods of low volatility, high valuations and deviations from the long term mean are terrible times to “jump in.” Short term indicators are flashing for a correction and I am not one to fool myself. Weak earnings growth, low interest rates and high valuations are not the recipe for the beginning of a bull market. However, they are not the recipe for an outright disaster either. Which is why I remain invested in equities albeit at a slightly lower level than long term targets suggest. As I have stated before, markets can get well ahead of themselves and it is very damaging to miss good days in the market. We are squarely in a later cycle overconfidence scenario. They tend to not end well but we always take what the market gives us.

With central banks on the sidelines and asset levels continuing to rise we find ourselves in a conundrum. The markets are pricing in a reaccelerating of growth at a time when macro-economic imbalances are rising. For example, there is still the real possibility that trade negotiations fail over the longer term. However, manufacturing has stabilized and fiscal and monetary stimulus remains a backstop to any slippage in GDP growth forecasts. All of this argues for us to stay invested in markets while taking a balanced approach to asset allocation. We remain slightly higher in our cash levels than normal and overweight the more “defensive” areas of the market like Consumer Staples and Healthcare. It’s better to be slightly wrong and still make returns than disastrously wrong and not (or worse).