2nd Quarter Newsletter 2019
After an unusually cool May, and a mixed bag through much of June, the end of the month ushered in a period of hot and sunny weather here in Maine; a little too hot for some of us. As July winds down, and the days continue to shorten, August may bring some of the best summer weather. We’ve just finished a vacation at our cottage, and as usual, we’re thinking how fast summer goes and savoring the opportunities over the next few weeks to enjoy it.
The markets have given us much to enjoy in the 2nd quarter. July has seen major domestic indices make new highs, and the widely held expectation for the 7/31 Fed meeting is that they will cut the Fed Funds Overnight Rate. Tim Paulson, Investment Strategist for Lord Abbott, discusses in the 7/22 newsletter, “markets have already priced in almost 4 rate cuts over the next 12 months.” Recent economic data continues to show strength in consumer spending, and low inflation figures. As we move into the Dog Days of summer, can we expect the U.S. Equity market to perform well?
David Bianco, Chief Investment Strategist at Dorsey Wright, addressed expectations for further advances in the 7/19 DWS Insights Report, noting “the latest incoming data suggests that the risk of an S&P profit recession is very high; but the risk of a broad-based U.S. recession remains low.” While Profit and GDP are related, they have different drivers. GDP is driven by household consumption, job creation, and productivity- fueled wage growth, and “service consumption dominates the U.S. Economy now. Nearly 70% of GDP is consumption; and nearly 70% of consumption is service consumption.” Dorsey Wright economic analysts have argued for several years that the current U.S. Economic Expansion would set a record for length. Recent economic data leads them to expect the expansion could run 2-15 years, with U.S. fiscal policy post 2020 elections, “the next bridge to cross”.
Nuveen released a report from their Global Investment Committee, discussing the outlook for remaining 2019. Jose Minaya, President & CIO, introduces the GIC July report, recalling that the Committee had begun 2019 with the theme, “Expect a Tougher Climb.” We experienced some tough spots in the first few months. The GIC thinks the market can continue to make progress; but the 2nd half will likely be tougher than the first. The Committee is emphasizing “Quality Defensive Growth stocks, more resilient yield opportunities in fixed income, and yield diversification,” outside fixed income. He states, “all members of the GIC agree...now is a time to focus on selectivity…diligent research, focused risk management, and careful portfolio construction.”
A common thread among these strategists is that a slowing global economy, trade wars & tariffs, and the possibility of Fed action in coming months may not match expectation, could impact growth, but aren’t likely to cause a recession. Consumer consumption, low inflation, very low interest rates, and healthy corporate balance sheets should allow for continued economic growth, albeit at a slower rate, and could give the market energy to move higher. Risk management, careful selection of equities, and focusing on the portfolio as a whole vs. the investor’s goals and risk tolerance, will continue to matter.
On the fixed income front, the 10-year Treasury continues to trade in a narrow range around 2%. Muni bonds have outperformed Treasuries again ytd. The market has already priced in the expected Fed cuts. Nuveen still sees value in munis, especially longer maturity and some high yield issues. Demand for munis remains strong in the marketplace; and supplies are expected to remain tight for the rest of the year. We continue to look for opportunities in municipal bonds in our managed bond portfolios.
Mainers know how quickly a sunny day can turn into a thunderstorm. We keep an eye on the skies, taking precautions while we enjoy our summer activities and take cover when volatility increases. We run our clients’ portfolios in much the same way, taking advantage of arising opportunities, watchful for increasing risk, and prepared with a game plan to handle changes in weather. Enjoy the rest of the summer! We look forward to catching up with you this autumn.
Warmly,
The Galarneau Group
