What A Roller Coaster Ride!
We are midway through 2019, and the equity markets have not only managed to recover from the downward spiral that started towards the end of last year, but they have gone on to reach new highs. U.S. stocks, as measured by the S&P 500 and Russell 2000, were up 18.54% and 16.98%, respectively, through June 30th of this year. It’s been quite a ride for most equity investors and reminded me of my daughter’s first big roller coaster ride earlier this year.
One could point to any number of factors that led to the market volatility we witnessed at the end of last year, but two factors seem to stand out: Ongoing trade tensions and the Fed’s hawkish stance with regards to interest rate policy. While the trade tensions remain largely unresolved, the Fed took on a more dovish stance at the beginning of the year and it seems to have contributed to the quick turnaround we’ve seen in equity markets so far this year.
Index Returns (%)
Source: JP Morgan Asset Management: Data through 06/30/2019
Economic numbers continue to support the longest running economic expansion in history. The strong labor market has helped maintain low unemployment rates which are now near 50-year lows. Gross domestic product (GDP), which measures our nation’s economic output, continues to grow. While there has been a bit of apprehension over the slowing rate of growth, first quarter 2019 GDP surprised analysts by growing at an annualized rate of 3.2%. And last but not least, consumer confidence remains strong, helping to support continued economic growth.
The Fed Got Out Of The Way
The Federal Reserve may be in part to credit for the current success of both the stock market and continued economic growth. This lies not so much in what they have done, but more so because of what the Fed hasn’t done.
After five successive quarters of rate hikes, the Fed finally pushed the pause button. This means that instead of continuing to raise rates, they will take a wait and see approach with regards to future rate decisions. This has renewed investor confidence and may be helping to drive the impressive stock market gains that we have seen so far this year. Currently, the federal funds futures are pricing in rate cuts during the second half of the year. However, this can change and will be data dependent. Keep in mind that the Fed has a history of voting in line with market expectations regarding interest rate changes and it will be interesting to see if this pattern continues to hold true.
The Bond Market
The closely watched US 10 year treasury yield briefly dropped below 2%, hitting lows we haven’t seen since November of 2016. The US debt markets may continue to face headwinds with globally suppressed rates ($13 trillion in negative yielding bonds worldwide) and a potentially more dovish Federal Reserve. Another recent development in the bond market is the yield curve inversion which has been in place since March of this year. An inverted yield curve simply refers to shorter rates paying more than longer term rates and could be an indicator of misalignments within the debt markets.
If you are an avid reader of different financial publications you’ve probably read about the dreaded “R” word lately and the correlation with an inverted yield curve. Although an inverted yield curve can have some correlation to softening economic output, it’s not always accurate. The National Bureau of Economic Research (NBER) is tasked with the job of calling and determining recession dates in the US. The 4 main metrics they focus on are (in no specific order): Personal Income, Employment, Industrial Production and Real Retail Sales. While some of these metrics are off from their recent peaks, others continue to show signs of strength. It’s important to note that we will have another recession at some point in the future but it’s unlikely to know exactly when this will happen.
The Markets And Your Finances
As the markets have shown recently, it’s important to make sure you are comfortable with the risk level in your portfolio and to make sure they align with your goals. At Fiduciary Wealth Management, we work closely with you to create a personalized portfolio and are committed to closely monitoring your strategies and progress on an ongoing basis. If it’s been a while since you’ve evaluated your financial situation and want a second opinion on your current investment portfolio, or if you simply have questions about the state of the economy, schedule a phone call now!
About Rocklin Senavinin, CFP®
With nearly 20 years of experience in the financial planning industry, Roc has dedicated his career to helping individuals live comfortably in retirement and enjoy the assets they have spent their career building. He is co-founder of Fiduciary Wealth Management, a fee-only registered investment advisory firm in Little Rock, Arkansas. As a CERTIFIED FINANCIAL PLANNER™ professional, he has advanced training in the holistic process of creating a personal financial plan that addresses a person’s comprehensive needs for the short and long term. To learn more, connect with Roc onLinkedIn or visitwww.fidwm.com. If you have questions, feel free toschedule a phone call using this link.
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