“It’s tough to make predictions, especially about the future.”
― Yogi Berra, Major League Baseball player, manager, and Baseball Hall of Fame member
We’ve all heard it said: “Records are made to be broken.” We celebrate record-breaking winning streaks from our favorite teams. Conversely, we hope to avoid a long string of losses. The bull market that began in 2009 is not the best performing market since WWII. That title still resides with the long-running bull market of the 1990s. But it is the longest running market since WWII. In the same vein, the current economic expansion is poised to become the longest running expansion since WWII. For that matter, it’s about to become the longest on record. It has run exactly 10 years, or 120 months, matching the 1990s expansion. Barring an unforeseen event, the current period is headed for the record books.
Yet, economic booms and long-running expansions can encourage risky behavior. People forget the lessons learned in prior recessions and overextend themselves. Consumers can take on too much debt. Businesses may over-invest and build out too much capacity. We saw euphoria take hold in the stock market in the late 1990s, and speculation run wild in housing not too long ago. That brings us to the silver lining of the lazy pace of today’s economic environment. Slow and steady growth has prevented speculative excesses from building up in much of the economy.
A sneak peek at the rest of the year
The Conference Board’s Leading Economic Index, which has a good record of predicting (if not timing) a recession, isn’t signaling a contraction through year end. But there’s one potential worry: the possibility of a protracted trade war and its impact on the global/U.S. economy, business confidence, and business spending. Exports account for almost 14% of U.S. GDP. It’s risen over the last 20 years, but we’ve never experienced a U.S. recession caused by global weakness.
By itself, trade barriers with China are unlikely to tip the economy into a recession. Total exports to China account for just under 1% of U.S. GDP. Even with higher tariffs, exports to China won’t grind to a halt and erase 1% of GDP. What’s difficult to model is the impact on business confidence and business spending, which in turn could slow hiring, pressuring consumer confidence and consumer spending. Simply put, there isn’t a modern historical precedent to construct a credible model. Hence, the heightened uncertainty we’ve seen among investors.
The Fed to the rescue
Rising major market indexes for much of the year can be traced to positive U.S.-China trade headlines (at least through early May), a pivot by the Fed, and general economic growth at home. We witnessed a modest pullback in May, after trade negotiations with China hit a snag. The threat of tariffs against Mexico added to the uncertain mood until June 4th, when Fed Chief Jerome Powell signaled the Fed would consider cutting interest rates to counter any negative economic headwinds.
While Powell’s not promising to deliver any rate cuts, one key gauge from the CME Group that measures fed funds probabilities puts odds of a rate cut at the July 31st meeting at 100% (as of June 28 – probabilities subject to change).
Falling rates in 2001 and 2008 failed to stem the outflow out of stocks as economic growth faltered. And, rising rates between late 2015 and September 2018 didn’t squash the bull market. During the mid-1980s, mid-1990s, and late 1990s, rate cuts by the Fed, coupled with economic growth, fueled market gains. It’s not a coincidence that bear markets coincide with recessions and the bulls are inspired by economic expansions. Ultimately, steady economic growth has historically been an important ingredient for stock market gains.
Our advice: Control what you can control. You can’t control the stock market, you can’t control headlines, and timing the market isn’t a realistic tool. But, you can control your portfolio. Your plan considers your time horizon, risk tolerance, and financial goals. There is always risk when investing, but we tailor our recommendations with your financial goals in mind.
If you’re unsure or have questions, let’s have a conversation. That’s what we’re here for. As always, we are honored and humbled you have given us the opportunity to serve as your financial advisor.