Happy Anniversary to the stock market! The U.S. bull market hit its 10th anniversary and is now officially the longest-running bull market in history. Feel free to celebrate with some cake and ice cream.
The first quarter of 2019 shows what can happen when uncertainties are removed from the market. At the close of 2018, the market was dealing with multiple pressures on several fronts. As the potential risks were digested and most of them resolved, the market was allowed to take a collective breath and continue forward. As we enter earnings season, this is the first quarter in a while where expectations of lower earnings is in play. As in the past, corporate guidance for the next 6 – 12 months will be a focal point for analysts. A surprise that may come? Earnings, while potentially lower, could be better than expected.
In the U.S., the fact that the economy is slowing is not surprising news. However, if you listen to mainstream media you would think we are in the middle of a recession and that is just not the case. We have been writing about this coming slowdown for some time. For example, industrial production is slowing, and we anticipate this trend to continue into the first half of 2020. We also expect retail sales to slow for most of this year. This does not mean we are in a recession, it just means that growth is slowing. Our forecast for GDP growth at this point for 2019 is around 2% - well off the 3%+ of 2018, but nowhere near negative. As the numbers look now, if we have a recession going into, or in 2020, it looks to be very mild.
As we progress through the year we should continue to see a strong labor market. In addition, the recent drop in interest rates has given a proverbial, positive “kick-in-the-pants” to the real estate market. This contrasts with the real estate market in 2018 which faced rising interest rates. A positive development, according to Goldman Sachs, is that signs are emerging we may have already bottomed in many markets. Financial conditions have loosened, the effects of the government shutdown are fading, and new expansionary policy in Europe and China should push growth higher through the remainder of the year. These are initial findings and we will keep a close eye on them.
As we mentioned in our last newsletter, planned adjustments in the portfolios to reduce some risk have been made, especially in the fixed income areas. Our diversified portfolios continue to perform well. The fast run-up in the first quarter has tempered our enthusiasm for additional gains during the remainder of the year. However, if further risks are removed from the market, i.e. Brexit and/or trade with China, and if favorable conditions persist, we could see more upside. As always, we appreciate your trust.
Marc Henn, CFP®