Summer 2019 Market Commentary
Summertime is one of the big times of the year for blockbuster movies. This seems somewhat ironic, since summer is also a great time to get outdoors. Nevertheless, if we were to give the last quarter a movie title, the one that comes to mind is “Twister.”
What started with a meteoric rise in the first month of the quarter was quickly followed by a stall and pull back in May, one of the worst months on record, and then followed by an even larger rise in June. According to the Wall Street Journal, the S&P 500’s gain of 18.5% is making the first half of 2019 one of the best first halves for U.S. stocks since 1997. How can this be when six months ago we were faced with nearly a 20% correction in the S&P 500?
We believe that markets tend to tell stories —real or imagined. This can be important, as stories tend to change very quickly based on the news of the day (i.e. tariffs). What has been challenging of late is that there are two separate stories from two important sources — the stock market and the bond market.
The stock market is telling a happy story. It is a story of economic growth, low unemployment, favorable tax rates, and growing corporate profits. This story is evidenced by none other than the S&P 500, the 500 largest companies in the Unites States, which are up 18.5% for the first six months of this year — an astounding number. In addition, there is corroborating data for this story. The job market is as strong as it has ever been. Brian Wesbury and colleagues from First Trust estimate that job openings are 1.6 million greater than total unemployed. They also point out that the economy has been strong, with GDP in the first quarter of this year growing at about 3.3% and retail sales increasing by 2.9% year-over-year for May 2019, and that economic growth has continued in the second quarter with GDP growth estimated at about 2% (softer than the first quarter but still positive).
The bond market is telling a very different story, more of a thriller. In the bond market story, the economy is slowing down faster than expected, forcing central banks to reduce interest rates in order to maintain economic growth. There is corroborating evidence for this gloomy forecast as well. Data points include a higher number of long-term unemployed, slowing growth in the Purchasing Managers Index (an economic indicator for the manufacturing and service sectors), slow international economic growth, and trade wars. The Federal Reserve has stated, “uncertainties about [a sustained economic expansion] have increased.” It is important to note that the bond market’s story is about the economy and not about the stock market. In fact, if the Fed lowers interest rates, it is reasonable to think that stock prices could increase, since interest rates are the discounting tool used in calculation of the value of a company. A lower discount rate leads to higher stock prices. On the other hand, if the Fed lowers interest rates, stocks could struggle because it may signal that the economy is weaker than expected and needs stimulus to stay afloat.
What do these two stories mean to you? In our opinion, the advantage many of you have over either story is a long-term investing time horizon. For savers — investors in the accumulation phase actively working to build their portfolio through savings — a market drop may create an opportunity to buy at a discount. Sticking to a long-term plan, and not deviating when times are good or bad, can be a good decision for a saver to make. Current or soon-to-be spenders — investors in the distribution phase accessing and using their portfolio funds — need to think about these stories a little differently. A good strategy for spenders is to have a plan that includes a sufficient allocation to cash and bonds if stocks were to decline. It is important for spenders to understand that the goal is to manage risk, which is quite different from savers, whose goal may be more focused on growth. Our Advisors strive to create a plan suited to your needs regardless of what stories the markets are telling.
So whose story is right — the stock market’s or the bond market’s? It may depend on your time frame. In the short term, it appears that the stock market has more control over the narrative. However, over the longer term, the bond market’s story may win the day. Of course, both sides will get bragging rights and claim victory. All we can do now is stick to our long-term plans and see how the “Twister” plays out.
The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Past performance is no guarantee of future results. To discuss any matters in more detail, please contact your financial advisor.