Market & Economic Outlook | October 2019

by | Oct 15, 2019 | Monthly Market Update, Newsletters

 

In the Market & Economic Outlook, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement! 

 STATE OF THE MARKETS

STATE OF THE MARKETS (S&P 500 +19.50% YTD through 10/15/2019)

Over the last 12-months, stocks have gone nowhere – rising just 2.2%. But beneath the surface, we’ve seen a big shift from the technology momentum stocks into value stocks. Also, bond proxies have done extremely well – like consumer staples, utilities, and real estate. Driving most of the gains this year has been a new easing cycle by the Fed. The S&P 500 Index has struggled to stay above 3,000. Renewed fears of a possible recession are creeping back into conversation after the ISM Manufacturing report hit its lowest level in 10-years. 

In our opinion, the Fed has remained far too tight and has been behind the curve. The risks of a recession in the next 18-months is elevated unless they take more decisive action – like a 50 basis point cut or at least an indication that they will continue to ease further in the months ahead and/or expand the balance sheet. We expect to see another ¼ point rate cut in October and one more in December. According to J.P. Morgan Chase & Co., 16 countries cut rates in the third quarter with almost two dozen more expected to cut rates in the fourth quarter. These moves are forcing investors to seek yield wherever they can find it – particularly in our higher yielding Treasuries and dividend paying stocks. 

As we head into the 4th quarter, unemployment is at a half-century low, inflation is in check, GDP is growing around 2%, and housing and consumer sentiment remain strong. We believe these “Goldilocks” conditions are ideal for stock investors. Stocks are still fairly valued, particularly when you consider that next year’s earnings are expected to rise +10.5% and revenue +5.7%, respectively (FactSet October 2019). Plus, it’s a very rare moment when 60% of the companies in the S&P 500 Index yield more than Treasuries!       

ECONOMIC UPDATE

IS THE 10-YEAR TREASURY GOING TO 1%?

While the 10-year Treasury is currently at 1.53% and the 30-year Treasury is at 2.03%, we believe rates are likely heading lower – particularly in light of continued weakness overseas. If you would like to take advantage of potential lower rates, you might want to  consider refinancing your mortgage and convert a floating rate loan into something fixed for a longer period.

CHRISTMAS SALES SHOULD BE STRONG!

According to AlixPartners, holiday sales are expected to rise between 4.4% to 5.3% this year. With unemployment at a 50-year low and wages rising 5% annually, consumers continue to feel confident. However, in August consumer spending slowed and an early September report on service activity showed softening conditions. This may be a result of the trade war with China. While tariffs normally imply higher prices for consumers that hasn’t been the case so far. 

INTERIM DEAL WITH CHINA?

We wouldn’t be surprised if an interim deal is reached – with phase two coming after the election. We could see a deal where China agrees to buy much more of our goods, opens their markets, etc. and we suspend most of the imposed tariffs. This would boost the world economy and improve our GDP – and likely avert a recession in 2020. It makes no sense for the U.S. to play hardball at this juncture, particularly when we risk an even further slowdown and possible recession. China has the luxury of playing the long-game – waiting us out and hoping President Trump is not re-elected. 

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. Rising Dividend Stocks – Even More Appealing!

For almost every investor, rising dividend stocks should represent a cornerstone of your portfolio. For the first time in a decade, the yield on the S&P 500 Index is higher than the 30-year Treasury.

Rising dividends are important because they not only provide a growing stream of income but also are a sign of a company’s profitability as well as management’s confidence in the future. With interest rates likely heading lower in the coming months, rising dividend stocks become even more appealing. 

  1. Value Stocks Look Attractive

One of the areas that remains very attractive are value stocks. These are companies that trade at a significant discount to their intrinsic value. Value stocks have been neglected for years as high-profile growth stocks have dominated the headlines and disrupted old industries.

Value focused ETF’s saw record September inflows – $50.3 billion with the ETF advancing +5.5%. In addition, value stocks saw their largest divergence in performance from their growth counterparts this decade. Momentum stocks have seen significant outflows in recent weeks. These indicators may be the early signs of a reversal that could last many years – opportunity is knocking! 

Bottom Line

China and U.S trade tensions are easing, which could provide a positive backdrop for stocks in the coming months. We expect the Fed will continue lowering interest rates, and that the economy will remain stable and growing as we wrap up the year and head into 2020. Dividend-paying stocks continue to provide rising income and appreciation in this low interest rate environment. Stay strong and stay long (in stocks).


Casey is following her passion and working towards getting certified as a fitness instructor! She aims to lead by example and wants to show her daughters how to live a healthy life.

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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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