To Sell, Or Not To Sell, That Is The Question
It’s been almost a year since the last time we updated you on the state of the economy and global markets. It has definitely been a busy and interesting one. Here is a look at our current view and what we feel is in store moving forward.
Over the past year there has been a lot going on – trade war with China, a split Congress, impeachment talks, one of the worst quarters in stock market history and Brexit turmoil to name a few. In spite all of that, the U.S. stock market has risen back to all-time highs. Why? Well, the 4th quarter drawdown in equity prices was really an overreaction to slowing economic growth, a less accommodative Federal Reserve, and the unknown impact the trade war would have moving forward. Since that time, we’ve seen the central banks around the world reverse course and cut rates. They’ve entered a more synchronized period of accommodative policy which has been a much needed boost. We’ve also seen that the trade war isn’t going to tip the economy over by itself. It has, however, filtered its way into a myriad of economic data leading to a slower growth environment around the world. The markets also seem to be ok with no further escalation in the trade war – it isn’t creating a recession, but it is still putting downward pressure on expansion around the world. Lastly, the US economy has been pretty resilient with GDP growth still at or above 2%. Meanwhile, the Euro Area and Japan have posted negligible GDP growth with Germany actually contracting slightly earlier this year. All of that points to a stabilizing economic environment at slightly lower levels.
So, what does it look like moving forward?
- Corporate earnings look like they will continue to expand into 2020. Some of it stems from the fact that supply chain concerns tied with China-US trade war were overblown – many multi-national companies have already began making goods in areas other than China. There were a lot of worries initially that this transition would take longer and have a more meaningful impact on corporate profits. Manufacturing PMI in the US posted its highest level in seven months for November – further pointing to more stability in the economy and a stage for further growth in profits.
- The US consumer also remains resilient. With wage growth continuing to expand, unemployment still near all-time lows, and pretty healthy household balance sheets, we are seeing consumer confidence continuing to remain high. That should be a positive heading into the holiday season.
- The truce in the trade war is a good thing. At this point the market seems to have priced in the negative outcomes, but if tensions escalate again, we could see more downside. On the flip side, further resolution could actually lead to more upside. In reality, the genesis of the trade war and the main sticking point is not about whether China will buy more US goods, it is about intellectual property theft and how to enforce it. That remains unresolved and could very well drag on for years to come. So while the trade war isn’t going away, it is on hold for the time being.
- Politically we are dealing with a Congress focused on impeachment hearings at the moment. While it doesn’t really seem like that will get passed in both chambers of Congress it is detracting from their ability to provide any pro-growth fiscal policies. The Republicans and Democrats don’t seem to agree on much, but what they do both support is infrastructure spending and potentially a payroll tax cut. If we got either of those it would be a positive boost to growth.
- As mentioned above, the Fed has reversed course and cut rates a couple times this past year. The message from the Fed is that they are now on an extended pause and they feel that interest rates are at the right levels to support continued economic expansion. The dual mandate of the Fed is low unemployment and inflation around 2%. In reality, the Fed’s inflation target is an average rate over a longer time frame. We have been under the target for quite a while so the Fed will likely not raise rates immediately if we get to 2%. That points toward a high bar for raising rates going forward and a much lower bar for further cutting rates if they need to. It is also necessary for the Fed to keep some powder dry in the event of deteriorating economic conditions in the future. It looks like the Fed will remain on hold for the foreseeable future.
With that backdrop it doesn’t seem like we are headed towards a recession in the short or mid-term. And even if we got one, it won’t necessarily be like the Great Recession. Recessions and consolidation are a healthy part of overall long-term economic expansion. Certain events like a debt crisis (we’ve added $250 Trillion in debt globally in the past 10 years which does need to be dealt with at some point) or potential geo-political issues could lead to a deeper recession than just getting there as a natural part of the business cycle, but those don’t seem to be the likely outcomes as it sits today. However, there is a lot more uncertainty out there right now and volatility in the equity markets has also increased.
From an investment perspective that has led to us reducing risk in portfolios. So, I guess it really isn’t “to sell, or not to sell”, but rather how much and what to do with the proceeds. We have taken profits on higher beta stocks like the technology and consumer discretionary sectors and re-deployed those in more stable dividend paying stocks. We have also increased the quality of our fixed-income portfolios and continued to add to bonds when rates are higher. In addition, we are holding more cash right now as a way to further reduce volatility. As people are nearing retirement, they should definitely be moving towards more conservative portfolios with more of a focus on income and stability. For those further away from retirement, they should look to take some profits, but as long-term investors they still want to have exposure to growth sectors in the US and also exposure to emerging markets and international stocks.
Overall, we feel the global economy is beginning to stabilize in a slower growth environment. The possibility for accelerated growth is out there, but there is still a lot of uncertainty. In addition, the risks to the downside are real and if they materialize, we could be in for a protracted downturn. In light of that, we believe taking some profits and reducing risk in portfolios is warranted, especially for those nearing retirement. Headline risk and an upcoming election year will keep volatility higher than in past years but underlying that we feel the markets will grind higher and the economy will continue to expand moving forward.
As always, we appreciate your trust and confidence. Please reach out to us with any questions.
Robert J. Phillips, CFP®
Greater Midwest Financial Group, LLC.
3222 Rice Street
St. Paul, MN 55126-3047
Phone: (651) 490-9790 Fax: (651) 490-9788
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Greater Midwest Financial Group, LLC is not affiliated with Kestra IS or Kestra AS.
CONFIDENTIALITY NOTICE This message is intended only for the use of the individual or entity to which it is addressed, and may contain information that is privileged and confidential. If the reader of this message is not the intended recipient, you are hereby notified that any dissemination, distribution or copying of this message is prohibited. If you have received this communication in error, please notify me immediately by replying to the message or calling me at (651) 490-9790 and deleting the message from your computer. Thank you.