Q2 2019 – Markets advanced with defensive leadership

By Mitchell Anthony

The US Economy continues to ebb and flow producing steady but below trend growth for several quarters.  This trend seems likely to continue as the economic environment stays extremely stable with low inflation, friendly fed policy, and employment at all-time highs.  The Current trends in the US economy show a mixed picture but generally improving economic fundamentals are visible. 

There is an abundance of positive statistics for bulls to hang their hat upon for remaining optimistic in this world of highly valued markets. There is no evidence that the tariffs from the Trump administration and countermeasures from the Chinese are slowing the US economy in any meaningful manner. As a result consumer confidence which declined earlier in the year is now on the rebound.  Trends with prices of goods and services are extremely positive and for the most part inflation remains bottled up.

Washington policy has had more impact on the global economy over the last few years than ever in history it would seem. All of the talk about tariffs and trade battles with China has caused concern from consumers and as a result the Fed has moved to an accommodative position and will likely cut rates at their next meeting.  Bond prices have already rallied in anticipation of this event and interest rates are close to their 2016 all-time lows.

These low Interest rates and all-time highs in employment have given consumers confidence to spend on discretionary items despite not having much pent-up demand for durable goods.  (pg. 4, fig. 1). Personal income continues to make new highs and entertainment and leisure spending continues at an above trend pace as optimism turns into real profits for corporate providers. (pg. 4, fig. 2). Growth in housing has not been as exciting as pent-up demand is modest and there are demographic trends playing out for apartment living which is obstructing homeownership trends.

What’s happening in the work force is more exciting for workers then corporate employers.  The poor productivity of these low-quality employees is hampering employers’ ability to expand their businesses effectively, however the problems are mitigated by continued gains in productivity from technology allowing the poor work force to still be effective for corporate America. (pg. 4, fig. 3).

The manufacturing and industrial side of our economy lacks confidence because of the workforce problems and the uncertainty about tariffs and global economic strength. All of these factors continue to affect the US economy and as a result we have an economy that ebbs and flows.

This environment is actually ideal for financial markets and as a result our financial markets have stayed on the upward path that began in January of this year. For the most part risk is on with investors but yet there has been defensive leadership in our markets.  The second quarter of 2019 was good for both stocks and bonds with most equity and bond indices producing 3 to 5% returns for the quarter.  Corporate American superstars (FAANG) rallied on par with the broader market, held back by the unfounded fears of recessions.  (pg. 4, fig. 4). The rally in Treasuries that began in the fourth quarter of 2019 continued at a modest pace last quarter as bond investors have been reluctant to give up on their belief that a recession lies on the horizon.

Most equity indices are at or near 2018 all-time highs.  Concord’s Dynamic Growth portfolio is now pushing up against its 2018 all-time high as the under-performance from large positions in corporate American superstars begins to wane.  MACM’s Dynamic Growth portfolio has about 100 basis points of lead on the S&P 500 this year.

The Economic outlook remains positive with no recession or economic bust visible on the horizon.  Confidence is already improving as expectations for lower interest rates from the Fed builds.  These lower interest rates are already stimulating soft consumption and giving corporate purchasing managers confidence to get back in the game.  Financial markets are highly valued and will likely remain highly valued in this seemingly recession-less environment that ebbs and flows.  Stocks bonds and real estate will likely remain highly valued.  Stocks seem like the most ideal asset class of the three as gains in corporate earnings will push prices higher.  Interest rates on Treasuries and corporate bonds are close to zero and hence the upside for fixed income seems modest at best. (pg. 4, fig. 5). Real estate also has a difficult outlook for growth as cap-rates are close to all-time lows and unlikely to push substantially lower to justify higher prices. (pg. 4, fig. 6).

We remain optimistic!