Animal Dispirits: From Aging Bull to Market Mule?

October 3, 2019

Our Third Quarter 2019 Economic Outlook

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This is a summary of our latest commentary. The full paper  including exhibits is available via download.

  • Long-time readers of our Economic Outlook know that we’ve leaned toward an optimistic view of equities and other risk-oriented assets for the past 10 years. In the instances that markets sharply corrected during this period—sometimes exceeding the 10% minimum drop from recent highs that qualifies as a moderate correction— we viewed the pullbacks as buying opportunities.
  • Where do we go from here? We believe the U.S. economy remains in reasonably good shape and appears to be in little danger of actually contracting any time soon. Granted, the manufacturing and agricultural sectors are being stressed by the trade war with China. But we think there is a limit to how far this deterioration in economic activity will go. Few economists, for example, would dispute that the U.S. consumer sector is in great shape.
  • In terms of policy, the Federal Reserve (Fed) remains supportive. Policymakers voted twice this year to lower the federal-funds rate, first at the end of July and again in September (by 0.25% each time). Additional rate cuts are widely expected to come before year end. We note that the Fed has already halted quantitative tightening, meaning that it is no longer letting its balance sheet contract as securities in its portfolio mature.
  • Looking at the U.S. stock market, as measured by the S&P 500 Index, the forward-earnings trend has flattened in recent quarters. Periods of flat-to-down earnings over several quarters occurred in the 2014-to-2015 period, and in 2011, 2007 and 1998. Each coincided with flat-to-declining stock prices, increased volatility and moderate-tosevere market corrections.
  • A trade truce between China and the U.S. would be a relief, but it would be only one piece of a larger mosaic that must first come together. Getting the world back on a faster growth track will depend on an economic rebound in the domestic economies of China and Europe.
  • Looking abroad, despite the rather solid financial position of U.K. households, confidence has been on the decline for U.K. consumers and businesses. In fact, both consumer and business confidence are nearing levels consistent with recession. Confidence measures in the eurozone, while off the highs of 2017, have not fallen to same degree.
  • The decline in earnings growth from last year in Japan is surprisingly steep. Despite all their efforts, Prime Minister Shinzo Abe’s government and the Bank of Japan have been unable to spur a lasting reflation of the economy.
  • While we don’t see a bear market on the horizon, in view of the uncertainties facing investors, the prediction game is even more challenging than usual. Accordingly, as always, we believe in a diversified approach to investing. Although maintaining exposure to equities and other risk-oriented assets can at times feel uncomfortable, it is our view that investors with long time horizons should avoid timing the market or making outsized sector or regional bets. We think it is best not to assume, for example, that the S&P 500 Index and growth stocks will always be the only games in town. The recent volatility and sharp style rotations in the past quarter should serve as reminders that trends do not last forever.

A full-length paper on these timely topics is available for download.

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Index Definitions

S&P 500 Index: The S&P 500 Index is an unmanaged, market-weighted index that consists of 500 of the largest publicly traded U.S. companies and is considered representative of the broad U.S. stock market.

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This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information is for educational purposes only and should not be relied upon by the reader as research or investment advice.

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