Up, Down, and All Around
Recently we’ve seen markets and interest rates bouncing all around. The worst December since 1930 was followed by a strong recovery in early 2019, which was followed by a sharp decline of nearly 6% in the S&P and 9% in the Nasdaq in May, which was followed by the strongest June since 1938. Meanwhile the yield on the 10-year treasury bond has declined from 3.25% to under 2%* and that has everyone singing that old Marvin Gaye tune – “What’s Going On”? I’m writing today to give you our insights into where the economy and markets are at, why, and where we see things headed.
While the US economy has been cruising along nicely – posting a 3.1% GDP gain in the 1st quarter** – there have been some strange sounds coming from under the hood. The first one has been caused by the trade war with China and it’s getting louder. Despite seemingly having a deal in hand, it now appears that tariffs and retaliations are escalating. And, it’s been suggested that China might stall until next year’s Presidential elections to try and get a better deal. And, while that may not be a problem yet for consumers, it sure is for businesses – and that’s what’s causing the second concerning noise under the hood. Business investments and longer-range planning are taking a hit, and that’s showing up in softer economic data points here and abroad. It was just reported that: new home sales declined 7.8%, the PMI dropped to just over 50 (a reading under 50 indicates a contracting economy), and Chicago PMI came in under 50, industrial production shrank by 1.3%, and consumer confidence dropped a full 10 points ***. Even though we don’t think a recession is imminent, clearly people are worried about the slowing global growth trend.
So, what about those all-time market highs you say! The truth is we are just getting back to highs set in the S&P 500 last September and the highs set in the Nasdaq last August, and both of those highs were only slightly higher than those set in January 2018. In addition, recent new highs have occurred in defensive sectors like utilities and consumer stables, not high growth ones. We believe we are closer to idling than cruising along. Stock markets have been buoyed by the hope for a trade deal and the Federal Reserve lowering interest rates but …? And isn’t this ten-year economic expansion already the longest in history?
So, what’s ahead? One thing that is clear, Central Banks around the world have or are very supportive of lowering rates back to historic levels. But when markets are at an all time high, lowering rates doesn’t usually elevate markets initially. In fact, they usually go down first.
The other thing that is clear is if businesses are unable to make decisions about investments in plant, equipment, inventories, and suppliers, we will likely see more soft economic reports ahead.
So, what are we doing? We’re taking profits. You have probably noticed that we sold some profitable higher growth positions in May and again recently here in June. While we don’t expect a sharp decline in Global growth, we believe some softer data points are probably “baked into the cake” already. So are lower US interest rates. And while it seems that we may see a tariff truce at the G-20 meetings, it’s likely that trade uncertainty will persist. In other words, downside risks seem to outweigh upside surprises.
Are we timing markets? No, we’re being cautious. It’s prudent to manage risks while striving for the best returns relative to each client’s objectives. Oh, and speaking of risks, have I mentioned Iran and the geopolitical risks looming? We also feel it’s prudent to keep some powder dry during periods of elevated uncertainty. That way when opportunities surface, we can take advantage of them.
In closing, there’s a lot of noise out there, and while some of it is concerning, we are hoping for a smoother road ahead. I think I’ve said it before, but it’s worth repeating, relax and leave the driving to us. As always, please reach out should you have any questions. We hope you have a great 4th of July!
Donald J. Phillips, CFP®
Chairman of the Board
Greater Midwest Financial Group, LLC.
3222 Rice Street
St. Paul, MN 55126-3047
Phone: (651) 490-9790 Fax: (651) 490-9788
Greater Midwest Financial Group, LLC is not affiliated with Kestra IS or Kestra AS. 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.
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The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.