THIRD QUARTER 2019 NEWSLETTER
While many things have happened since we published our Second Quarter Newsletter, investors appear to have absorbed the good, the bad, and the just plain bizarre, without losing confidence in U.S. Equity Markets. The third quarter closed with the DJIA just missing a record high by about 7 points, or 0.1%. The S&P 500, NASDAQ, and Russell 2000, all made new highs - the 39th this year for the S&P, and the 50th for both the NASDAQ and Russell. The Dow posted its first 8 quarter win streak in 20 years, according to CNBC’s Third Quarter Market Wrap Up. With the Fed seemingly still in a cautious stance and ready to lower interest rates again if their data indicates off-target results, the FTSE 10-year Treasury Index, and the Bloomberg Barclay U.S. Bonds, Global Bond, and Muni Indexes, all were well into positive territory YTD.
Our outlook for the U.S. Equity market is much the same as it was in mid-summer. We note continued strength in consumer confidence, unemployment numbers in line with expectations, and overall earnings still growing, but with the rate of growth continuing to slow. The U.S. Economy enjoys a position of relative strength vs. that of other major global economies. Consumer Confidence is a dominant theme in analysts’ discussions about the ability of markets to go higher. Franklin Templeton reported recently in “What Franklin Templeton Thinks Q4 2019,” that the probability of a recession remains “only moderate;” and that “near term slowing of earnings growth isn’t likely to lead to a recession.” They point to high levels of employment and consumer confidence in the U.S. and Europe. However, uncertainty about the effect of ongoing tariff conflicts and worldwide economic growth could increase to the point where companies begin to scale back capital expenditures; “the result could be a self-fulfilling mechanism.” They continue to emphasize bottom up security selection.
Nuveen Investment Outlook for 10/16/19 discusses that corporate profit growth “is critical to driving U.S. and global equities higher. Revenue growth remains healthy in large part due to strong consumer spending,” which has helped offset the potential negative impact of trade war concerns. They see the balance of risk and reward for investors having “shifted meaningfully” in the third quarter, requiring more care and caution in constructing portfolios. David A. Chalupnik, CFA, explains that their position has become more defensive in the third quarter, but “we are hopeful that the outlook for trade and global growth will improve in the final quarter of 2019 into early 2020.”
While the U.S. equity market enjoyed a colorful display as the quarter ended, we know that uncertainty about trade policies, Brexit, China’s economy, and the turbulence in Washington D.C., are among potential windstorms which could quickly dispatch the beautiful foliage we’re currently enjoying. We continue to feel optimistic about the potential for additional gains in the market, especially in some sectors, but are playing strong defense as we look for opportunities to raise the score. Strong dividends, value, and business flexibility in handling different economic scenarios, are among the attributes we look for.
On the fixed income front, economists are expressing concern about negative interest rates globally. Franklin Templeton discussed that “central banks around the globe are doubling down on unconventional policies with little history to draw on. Negative rates can be counterproductive.” Dorsey Wright commented in the DWS U.S. Economic Outlook, 10/21/19, “the Fed itself seems unsure” about when a fourth-rate cut could happen, noting the internal disagreement among Fed members surrounding the last cut. They see the Fed as being “data dependent’ setting out the benchmarks they are using to gauge the health of the economy and watching the data carefully to determine the need for further cuts. “In our view,” Dorsey Wright says, “plenty of risks to the outlook are likely to remain during the next 12 months, and most of them are to the downside.” Anticipating that rates will likely drop further at some point, we continue to favor short to intermediate maturities overall, but also to look for opportunities in longer term investment grade bonds, especially munis, where higher yields may be available at a good value.
Halloween approaches; and even at our age, we enjoy Trick-or-Treating. We’ve been at it long enough to know you can pick up a bag full of goodies; but witches, goblins, tricksters, and ugly dogs, are all part of the experience. Best to be cautious. As the quarter moves on, there will be turkey, gifting, and great times with family and friends. And oh yes, there will probably be snow. We hope you enjoy all the good things the quarter will have in store.
Please join us if you can for our Annual Open House on Friday, November 15, from 4:00 to 7:00. Save the date cards are in the mail. Our favorite caterers will be back; and we are sure to have some delicious treats to enjoy at the event. We hope you have much to celebrate over the fourth quarter; and we are extremely thankful for your business and your trust. It is our pleasure to work with you.
Warmly;
Debbie and Preston
