HFA Market Insight & Perspective

Thomas BalisOctober 23, 2019


Last month, the U.S. Federal Reserve decreased short-term interest rates for the second time in three months.  Democrats in the U.S. House of Representatives launched an impeachment inquiry surrounding President Trump’s interactions with Ukraine. And the market, more or less, shrugged.  U.S. stocks (as measured by the S&P 500 Index, a broad measure of large public U.S. companies) gained 1.87% for the month, improving upon a sideways July and August.  For the year, the S&P 500 is up just over 20% through September 30.

Bonds have rallied nicely as well, with the Barclays Capital U.S. Aggregate Bond Index up over 8% for the year.  And, while international developed markets and emerging markets were both down slightly for the quarter, both are still up double-digits for the year.  Having come so far, some investors may wonder if there is any gas left in the tank.  We’ll need to ask the American consumer for that answer.

The consumer, for now, is fairly solid.  U.S. unemployment has dropped to a new low of 3.5%.  Wage growth has increased to 3.5%.  Inflation remains low. Household debt service is down, net worth is up, and the consumer is, well, consuming.  Consumption makes up 68% of GDP, and has fueled continued GDP growth in the U.S. despite the volatility in the stock market.  While Germany may well be in a recession, the U.S. certainly is not.  Moreover, prior recessions in the U.S. have generally been driven by asset bubbles, fed policy errors, excess in cyclical sectors, or energy shocks.  None of these would currently appear to be an imminent danger to a pretty resilient U.S. economy.

Our base case at HFA anticipates a continued slowing of the economy as the impacts of tax reform wear off, and as slower growth overseas impacts domestic growth.  Importantly, slowing does not equal stopping or reversing. To use a freeway analogy, the U.S. economy may make a transition from going over the speed limit last year to going under the speed limit for a couple of quarters before traffic clears up. Importantly, with an absence of a further trade escalation or sentiment shock, the economy should continue growing, albeit more slowly.

Nevertheless, the economy and the markets don’t always march in lockstep.  The current year has seen plenty of volatility, with more to come.  Trade headlines continue to sway markets.  Impeachment jitters may create some uncertainty.  Fortunately, history may be encouraging on that score.  The S&P 500 rose 28% from the time the House voted to begin impeachment proceedings against Clinton to his acquittal when the Senate failed to convict him.  Investors, then, seemed well able to tune out that noise.  We continue to recommend sticking to your long-term investment allocation, and not changing investment strategy in response to the headlines. As always, reach out to our office if you want to discuss your portfolio (610-651-2777).

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