On the Horizon: Climbing a Wall of Worry, Again | First Quarter 2019
In a nutshell: Investors always have a laundry list of market related concerns, but there are a few dominant issues that are likely to drive investment activity and results over the coming months. Trade policies with China, Fed communications, and global politics present challenges for markets to navigate. Each was cited as a concern and reason for market weakness last quarter as well, but investors attitudes have again shifted. Investors aren’t necessarily disregarding the issues, but they are now choosing to take a more optimistic outlook on how each will develop or impact markets.
The Fed, China, Brexit and Washington, DC: On the Horizon
There are typically some themes, data points, and scheduled events that can reasonably be expected to impact markets. And though unanticipated events always occur, we address the more typical and predictable ones below. We also attempt to gauge what the market may be anticipating given that markets place their bets ahead of actual announcements or resolutions based on what the market believes the likely outcome will be. Therefore, market reaction is often more a result of how different the actual result was from investors predictions.
- What does the Fed know that equity investors don’t? On March 20th, the Fed provided substantially new and different guidance for the remainder of 2019. They reduced their economic growth expectations and the number of rate hikes for the year. Previous guidance of two anticipated rate hikes was changed to none. Viewing this as a signal that the Fed was concerned about slowing economic growth, bond markets reacted immediately and meaningfully. Equity markets, on the other hand, had a far more muted reaction. The Fed doesn’t necessarily have the best track record in predicting economic growth, or more specifically recessions, but there was a clear contrast in reactions to the communication. Bond markets began to anticipate slowing growth and perhaps even a recession, whereas equities mostly shrugged it off. Markets are anticipatory. Presently, equities are not anticipating or pricing-in the slower growth that the Fed sees and certainly not pricing-in a recessionary environment. Only time will tell which market has it right.
- Will the U.S. and China finally reach a trade deal? After more than a year of trade rhetoric and increasingly hostile threats, the U.S. and China have seemingly gotten down to the task of hammering out a trade deal. Both countries seem to recognize that a deal is in their own best interests economically and politically. Nothing is done until it is signed and approved, of course, but recent communications have been positive. As a result, markets are now increasingly optimistic that a deal will get done. That may presently be the most probable outcome, but the likelihood raises the stakes in terms of what would happen to markets should talks fall through and a deal not occur.
- Brexit: Deal or No Deal? No, we aren’t anticipating that Howie Mandel will begin hosting a U.K. version of the popular Deal or No Deal gameshow. We’re referring to whether U.K. Prime Minister, Theresa May, can finally broker a deal between the U.K. and EU. Details on what is happening with Brexit are changing faster than we can publish this report, so we won’t even attempt to keep up. The U.K. is now past the original withdrawal date (March 29th) without a deal. The original deadline has been extended, although EU leaders were only willing to provide a very short extension with the idea that they wanted things squared away before the EU parliamentary elections begin on May 23rd. Nobody expected the process to be smooth, but the quagmire they find themselves in now would almost be comical if it wasn’t such a serious topic. A “no deal” exit from the EU would be chaotic and problematic, but fortunately the issue should be somewhat concentrated with the U.K. and its primary trade partners in the EU.
- Will Washington move on? The redacted Mueller report, just released to the public, may yet change the storyline, but the summary provided by Attorney General William Barr generally indicated that the report is not likely to result in a major shakeup. The Trump administration is already moving on to other policy related issues. We don’t know yet if the rest of Washington, mainly the Democrats, are as ready to turn the page. Regardless of party affiliation or preference, I think we can all agree that we’d rather our political representatives spend their time hammering out policy issues and not each other. Fortunately, in this regard, we suspect that market expectations are not high.
Last quarter we noted how investor attitudes had shifted around each of our listed concerns. Investors spent much of 2018 focused on what was going right, but they quickly shifted gears during the 4th quarter. Their optimistic outlook had shifted to only seeing what could go wrong or the worst possible outcomes. Fortunately, for investors, those attitudes again shifted in early 2019 and as a result, markets recovered. There were positive developments in areas like trade negotiations with China and monetary policy, but the list is not dissimilar from what it was a few months ago. The primary difference is around what the market is pricing in or expects. Markets were likely far too pessimistic at the end of last quarter, but it is yet to be seen if the pendulum has shifted to being too optimistic.
Contact Brad Swinsburg for more insight on the dominant issues likely to drive investment activity and results.
Explore more information on the first quarter of 2019 by visiting these links:
Unless stated otherwise, any estimates or projections (including performance and risk) given in this presentation are intended to be forward-looking statements. Such estimates are subject to actual known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those projected. The securities described within this presentation do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in such securities was or will be profitable. Past performance does not indicate future results.