If we reflect back on the first three quarters of 2019 purely from a market perspective, the conclusion would be quite positive. Almost all asset classes are up by double digits including U.S. stocks, international developed market stocks, and fixed income. This has all been in the face of multiple uncertainties, including trade conflicts, political turmoil, and a clear global slowdown in economic growth. U.S. large cap equities have led the charge, supported by a workhorse consumer that continues to spend thanks to wage growth and strong employment.
The Fed is acutely aware of the potential for a reversal in this positive consumer sentiment and has been trying to get ahead of the curve. Internationally, other central banks have moved even more aggressively, with monetary stimulus pushing negative-yielding debt up by about $10 trillion in the last nine months. One disturbing observation is that much of this stimulus does not seem to be yielding any results, as global growth continues to decelerate. Effectively we could be running out of tools at the wrong time.
As we look towards 2020, our strategy will continue to be finding attractive companies whose cash flow will hold up during a slowdown. The 10-year bond yield could sink below 1% in a slowdown, and anything of quality with a spread of 200 basis points over the 10-year yield will be in strong demand. In addition, markets will pay up for growth as year-over-year revenue increases become harder to achieve.
With an election year looming, it’s going to be very difficult for the Fed to continue pushing rates down aggressively. At the most recent Federal Open Market Committee (FOMC) meeting in September there were three dissenting votes, so there does exist the possibility of Fed paralysis. Without that aggressive monetary support in 2020 we could see significant pressure on stocks. On the flip side, a negative trade outcome coupled with a full political meltdown as we close the year could force the Fed to push rates down more aggressively, which in the short term could lead to a Christmas rally.
Please let me know if you have any questions via phone at 804-774-2087 or email at Jesse.Ellington@middleburgfinancial.com.
Past performance quoted is past performance and is not a guarantee of future results. Portfolio diversification does not guarantee investment returns and does not eliminate the risk of loss. The opinions and estimates put forth constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.