Market Outlook: New Year – New Decade

January 8th, 2020 by Jonathan Chatfield, CFA

As the trade dispute with China seems to be moderating, the Fed in December maintained its federal funds rate target at 1.50 – 1.75%. After raising rates nine times since 2015, the Fed reversed course this year and cut rates three times. It also indicated it did not expect to make any change to its policy supporting growth in the months ahead. Any change in policy would depends upon economic data.

Inflation and Unemployment
• The key inflation rate (the Consumer Price Index excluding Food and Energy), is up 2.3% for the 12 months ended November, 2019.
• Meanwhile, the unemployment rate was little changed at 3.5% in November, compared to 3.6% in October as nonfarm payroll employment increased by 266,000.
• The Fed’s mandate is to foster maximum employment and price stability. In a slowing economy the rate cuts should provide stimulus and moderate any economic downturn.

Slowing global growth
• For the 3rd quarter, the pace of U.S. GDP growth was revised to 2.1% after posting gains of 2.0% in the second quarter and 3.1% in the first quarter.
• Meanwhile, the IMF lowered its forecast for global GDP growth in 2019 to 3.0% from 3.2% forecast in July 2019. The number is down from 3.6% in 2018. The IMF forecasts a 3.4% growth rate in 2020.
• Central banks around the globe continue to maintain lower interest rates to stimulate economies.
• Negative rates in Europe and Asia continue to drive demand by overseas investors for higher-yielding US treasuries, resulting in high prices and low yields for U.S. Treasuries.

Yield Curve Normalizes
• Until the ratcheting up of tensions with Iran, the yield curve had been steepening with the gap between long term and short term rates getting wider.
• The yield curve is no longer inverted, signaling an improvement in the longer-term economic outlook and reflecting the expectation of no further rate cuts from the Fed.

Stocks
• Forward 12-month earnings per share (EPS) estimates for the S&P 500 have declined slightly over the past month as analysts revised their estimates in the slowing economic environment.
• Further reductions in earnings estimates could pressure stock prices.

Anchor Bay Investment Strategy
At this time of slowing economic growth, downward revisions to earnings estimates, the unresolved trade dispute with China and a possible recession on the horizon, we continue to proceed with caution.
• We are in the late stages of the economic cycle and stocks are again priced near record levels.
• As the risk of recession receded in the fourth quarter, and the Fed lowered rates to support continued economic growth, we shifted to a neutral bias and are currently fully invested in the equity portion of the portfolio. We will continue to monitor the economy and markets and will adjust portfolios according to our outlook.
• Investment grade corporate bonds and U.S. Treasury bonds continue to trade at elevated price levels and offer very little in the way of yield. We continue to have an allocation to cash and short treasury securities on the fixed income side of the portfolio as we wait for opportunities to buy bonds at more attractive valuations.

With the market again hovering near all time highs, and in light of global economic and political risks, notably the flare-up in tensions between the U.S. and Iran, we continue to be cautious in our investment outlook. For now we will maintain a fully invested equity position and a focus on short-term treasury and corporate bonds. Future portfolio adjustments will be data driven.

Stay tuned…