Market & Economic Outlook | May 2019

by | May 21, 2019 | Monthly Market Update, Newsletters

 

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 STATE OF THE MARKETS

STATE OF THE MARKETS (S&P 500 +13.48% YTD through 5/20/2019)

Stocks climbed to new all-time highs in late April as investors celebrated solid earnings reports and renewed optimism about continued growth of the U.S. economy. In just the last four months, the S&P 500 has rallied +25% off the lows set on Christmas Eve, making this the best start to a calendar year since 1987. Stocks have also powered higher because the Fed has switched gears and is now signaling no more rate hikes in 2019.

One interesting trend to note is that despite the strong start to 2019, we have not seen money put to work in the stock market. Record amounts of money sits in cash, even today. Going forward, that could be a positive sign for stocks, as investors sitting on the sidelines grow impatient and may decide to put cash to work as they feel more comfortable with continued growth in stocks and in the economy, especially if a trade deal with China is reached (more on that below).

But what about the so-called “earnings recession”? As we entered 2019, many forecasters were calling for an earnings recession, which is defined as several quarters of earnings decline. Slowing global growth and weak car sales were the main reasons cited for the expected earnings drop of 2-4%, predicted by many pundits. Instead, 73% of S&P 500 companies beat earnings estimates, and earnings growth was around +2% in the first quarter of 2019.

Going forward, earnings are expected to accelerate over the coming quarters and rise 11.3% in 2020, which is a positive sign for continued growth in the stock market.

ECONOMIC UPDATE

If the U.S. economy continues to grow through the end of May, it will be the longest growth streak on a sustained basis in U.S. history – 120 straight months!

We remain optimistic that the U.S. and global economy will continue to improve. Here in the U.S., 1st quarter GDP growth was +3.2%, productivity grew +3.6%, and we had 263,000 new jobs reported.

The productivity of non-farm payrolls increased 3.6% in the first quarter and compared to last year, grew at its fastest pace in almost a decade. Increased productivity is a good sign of future growth in wages as well as growth in the economy, as a more efficient work force means companies can raise their wages without hurting profits.

The elephant in the room that has rattled the stock market this month is trade tensions with China. On Friday, May 10th, President Trump raised tariffs on $200 billion of Chinese goods after China “broke the deal.” The good news is tough trade talk with China is bi-partisan and that’s important if we hope to stop 20+ years of unfair trading practices (forced technology transfers, technology theft, hacking, and espionage).

The other bit of good news for trade negotiations is that the U.S. is in a position of strength. The 25% tariffs are expected to shave 0.3-0.4% off U.S. GDP this year. But in China it shaves up to 3% off their GDP in 2019. We continue to believe that a trade deal will happen, but we may have to accept some short-term pain with a rocky stock market in the interim.

INVESTMENT THEMES

In addition to opportunities that exist broadly in the current economic and market climate, there are several areas we are emphasizing in client portfolios:

  1. Review Your Asset Allocation

With stocks so close to their all-time highs, it’s a great time to re-assess your asset allocation and reduce your allocation to stocks, when appropriate. Because the market has been so strong in 2019, most clients have experienced an increase in their allocation to stocks, and for some, that allocation to stocks has become bloated.

While it may be difficult to cash in and reduce your allocation to stocks when times are good, the disciplined reduction to stocks in your portfolio should prove wise, when the next recession and stock market downturn arrives.

We continue to advise clients to reduce their allocation to stocks, when appropriate. If you have questions about your current asset allocation, please give us a call.

  1. Rising Dividend Stocks

A perennial favorite of ours at True North, dividend stocks tend to perform exceptionally well when the 10-year treasury yield is below its one-year average and declining. That is currently the case, so consequently, we continue to favor rising dividend stocks in virtually all client portfolios.

Rising dividend stocks offer the potential for an increasing stream of income, inflation protection, and some down-side protection when stocks decline. High-quality dividend stocks also provide investment-grade credit ratings, lower earnings-growth volatility than the S&P 500 Index, and a higher return on equity than your average stock – a great recipe for long-term wealth building in your portfolio.

Bottom Line

Stocks climbed to new all-time highs on renewed optimism about economic growth and the likelihood that the Fed won’t raise rates in 2019. Record amounts of cash currently on the sidelines could fuel further gains, if we get a trade deal with China.


Please help us in welcoming the newest member to the True North Team, Casey Stratton!

Casey is an Oregon native and lives in Oregon City with her husband and their two young daughters.Prior to joining the True North team Casey worked in Client Services at Fisher Investments for approximately 3 years. Casey specializes in providing our clients with unparalleled service and operational expertise. She understands the level of confidence it requires to trust someone with your assets and will do whatever it takes to help facilitate seamless account management for our True North clients. When not in the office, you can find Casey doing anything fitness related, or spending time with her family.

Casey holds a double BBA in Entrepreneurship and Marketing from the University of Portland.

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ABOUT THE AUTHOR

David Wilson
DAVID G. WILSON, JR., MBA

David specializes in working with families and business owners as their personal “CFO” by creating and implementing a financial roadmap designed to help them pursue their goals. He is proud that he still works with clients from the very start of his career (in 1982!).

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