Update on the Markets
October 1, 2019
Key takeaways
- Global Slowdown but no recession
- Consumer remains resilient
- Impeachment as political drama
- Hunt for yield
Stocks Keep Marching Along
Another volatile and exciting quarter ended with the S & P 500 index producing a small gain to extend the bull market – now the longest in history. With dividends, the S & P 500 index is up 20.6% year-to-date – one of the strongest performances in decades. We’ll see if stocks hold on. Remember last year’s fourth quarter when stocks lost 14%? Bonds performed well too, with yields crashing. At one point, the 10-year US Treasury bond hit 1.47%. It appears that the global economy is slowing. The culprits are as familiar as the ongoing trade war between the US and China, Brexit, a sick Europe, as well as a new one in a feisty Iran. The US economy remains strong, but will the slowing global economy affect us? There are a few worrying signs of weakness; for example, consumer sentiment dropped 8.6% between July and August but came back in September. And an inverted yield curve, a classic indicator of recession, has reared its head, though there are several technical reasons for such an occurrence. A recession seems doubtful for now. It’s all about the consumer, and with incomes rising, consumers should keep spending to keep this economic expansion alive.
Impeachment
On September 24, Speaker of the House Nancy Pelosi announced a formal impeachment inquiry into President Trump. The market’s reaction to the possibility of Trump’s impeachment is one big yawn. The S & P 500 index dropped a little more than seven points on that day and eventually rose to finish the quarter higher. Of course, it’s very early in the game and who knows what will happen, but I find it interesting that after years of political theater – midnight tweets, name-calling, the Mueller investigation, the border wall – the market may just be getting smarter. Is this recent political theater just another distraction tempting investors to gravitate away from what is important, like the economy, or is it something more sinister? Though the chances are high that the House will vote to impeach Trump, the show then moves to the Senate, where Republicans hold a 53-47 majority. Republicans may still dump Trump, but it doesn’t seem likely as of this writing. In the meantime, both sides of the aisle will continue to sling mud at each other instead of working on important issues facing the country, like health care, immigration reform, and infrastructure. Like the US-China tariff war, this is another situation that probably will not go away anytime soon, and will probably be with us until the 2020 election. Investors better get used to it. In the meantime, we have to focus on the economy.
Man’s Search for Yield
The global economy is slowing. Central banks are turning accommodative. Again! Around $15 trillion of global sovereign bonds sport negative yields. The 10-year US Treasury is yielding well under 2.0%. Inflation is stuck at 2.0%. 10,000 baby boomers retire every day. Demand for income is high, and, going forward, income will be a more important component of total return. Stocks and bonds are closer to full value, so the prospect of capital appreciation is dim. It’s not getting any easier to find decent, income-oriented investments. Standouts this year include preferred stocks, real estate investment trusts, and high yield bonds.
Please let me know if you have any questions or concerns.
Sincerely,
Henry
