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2018 Q3

The U.S. economy continues to be the little engine that could.  Many different measures of economic performance continue to advance at an accelerating growth rate including industrial production, retail sales and employment.  While this sounds good, economies do not fire on all cylinders without pausing, and it appears the pause we anticipate is still on target.  We anticipate the rate of growth in industrial production will begin to slow by the end of the 4th quarter.  In addition, we anticipate retail sales to begin to slow by the end of this year and carry over into next year.

With a new trade deal inked between Mexico, China and the United States, President Trump will find that he has a little more leverage in dealing with Europe and China.  The stock market, at least in the U.S., has not really been impacted by the trade dispute yet.  The same could not be said for Chinese stocks with U.S. exposure which have been hit very hard this year.  We don’t expect the trade dispute to be resolved with China anytime soon as there is more at stake than just trade, so expect a longer cycle than with our North American partners.

Interest rates have been pushing higher on all maturity time periods.  By example, the 10-yr Treasury is now over 3.20%.  This continues to put downward pressure on most fixed income investments.  A good measurement for intermediate, quality fixed income is the iShares Core US Aggregate Bond ETF (AGG) which is down over 2.50% for the year at this writing.  If you remember, we prepared for rising interest rates in the fixed income piece of our portfolios with some of our holdings.  This positioning has reaped benefits as our fixed income portfolios have fared much better.

For the stock market, we saw a nice lift in equity prices in the third quarter.  This has primarily been on the backs of technology companies.  As I have already mentioned in past writings, very few companies are providing the returns for the S&P 500 index this year.

This narrow breadth in the market is unusual.  We would expect, and like, to see market returns widen to include more sectors or additional classes of stocks such as value and dividend-focused companies.  One way this can happen is for technology stocks to fare much worse than other areas as the market “rebalances” itself.  As for international markets, they continue to struggle with the more volatile emerging markets down more than 12% this year at this writing.

Looking forward, economic growth should continue to charge ahead, however the stage is set for a potential recession sometime in 2019.  Our forecasts show that this recession, if it comes, would be mild and would give way to economic growth once again in 2020.  Our diversified portfolios continue to perform well especially given the backdrop discussed above, at a time when diversification is becoming increasingly important.  The stock market is pricing in another 3 rate hikes between now and the end of 2019, however the Federal Reserve could surprise with more.  A more hawkish stance by the Fed is a risk for which we are watching.   As always, thank you for your trust.

Best Regards,

Marc Henn, CFP®