Market OutlookNovember 12th, 2019 by Jonathan Chatfield, CFA
Against the backdrop of a continuing trade dispute with China and a slowing economy, the Fed lowered its federal funds rate target by another quarter point at its October 30 meeting. The target rate now stands at 1.50 – 1.75 percent. After raising rates nine times since 2015, the Fed reversed course this year and has now cut rates three times in an era of modest inflation and full employment. It also indicated it expected to pause in its series of rate cuts, and any further cuts would depend on economic data.
Inflation and Unemployment
• The key inflation rate, the Consumer Price Index excluding Food and Energy, is up 2.4% for the 12 months ended September 2019.
• Meanwhile, the unemployment was up slightly at 3.6% in October, compared to 3.5% in September as nonfarm payroll employment increased by 128,000.
• 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 further slowed to 1.9% 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 to 3.0% from 3.2% Global GDP, down from 3.6% in 2018, with a rise back up to 3.4% in 2020.
• Central banks around the globe continue to maintain lower interest rates to stimulate economies.
• Negative rates in Europe and Asia have spurred demand for higher-yielding US treasuries, continuing to be reflected in higher prices and lower yields for U.S. Treasuries.
Yield Curve Normalizes
• Since last month the yield curve has begun to normalize with longer term rates above short term rates at this writing.
• 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.
• Forward 12-month Earnings per Share (EPS) estimates for the S&P 500 are little changed over the past month after declining 0.6% in September 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 potential 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.
• We continue to maintain a bias towards reduced stock exposure in client portfolios and cut back on our stocks in light of the risk of economic slowdown and resulting earnings pressure on stocks.
• 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.
• Due to the risks in the market, we are maintaining over-weighted positions in money markets and short-term Treasury securities.
While we continue to be optimistic that low interest rates will continue to grow the economy, we believe it is prudent in the current environment to maintain a reduced exposure to stocks and wait for indicators and events to give us the next signal.