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Market Update December 17, 2019

Market Update December 17, 2019

December 17, 2019
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At 401(k) Engineers, it is important to us that you are well informed about what’s happening in the markets. Here are a few of the key topics of conversation that we feel deserve the most attention this month. If you have any questions or would like to continue the conversation, let us know, and we appreciate the opportunity.

Interest rates on hold while the economy continues to grow at a slow and steady pace.

What’s going on? After three consecutive interest rate cuts of 0.25% by the Federal Reserve, expectations for additional adjustments in the next six months have diminished. According to statements made by the Federal Reserve Chairman, Jerome Powell, the central bank is comfortable with the current low inflation environment as well as its projected growth of U.S. GDP figures, both of which are close to 2%. Jobs reports in December came in better than expected and was received well by the stock market. Meanwhile, unemployment figures continue their descent to historic lows, as the latest report decreased from 3.6% to 3.5%. According to statements from the White House, “phase one” agreements between China and the U.S. are imminent during 2020.

Why is it important? Coming off the heels of the summer months, investors were concerned that the inversion of the yield curve was signaling that softness in the U.S. economy could continue into the winter. However, as key sources of data have reported, the U.S. is in a healthy position with low inflation and full employment. Regarding the yield curve, three 0.25% interest rate changes by the Fed have resulted in normalization to the curve. All of these points have brought relief for investors in the nearterm. As the U.S. economy continues to push forward, eyes move towards trade resolutions with China as well as the fundamentals of stocks, such as earnings and cash flow potential.

What do we think about its potential impact? We have begun to see evidence that the market and the economy are now more closely aligned than previous months of the past year or so. Looking to the past, when good economic data was announced, the market would sell-off on fears of the Fed raising interest rates. Inversely, when poor data was announced, the market would rally on hopes of the Fed reducing interest rates. We called time slices such as these “opposite day” or “upside-down markets” due to their counterintuitive nature. However, now that interest rates have normalized and the economy continues its pace of slow and steady, investors are rewarding good economic data by buying stocks instead of selling them.

The month ahead: As 2019 ends and we celebrate an economic expansion that has graduated from one decade into the next, investors will be sure to monitor consumer spending during the holiday season. Roughly two-thirds of the U.S. GDP derives from personal consumption, and with record employment figures in effect, a strong holiday season would help kickoff 2020 in a positive direction. However, the looming trade agreements with China have yet to drop off our radar and the potential agreements between the two countries will be an important milestone heading into the new year.

The bottom line: Economic data made a decent turnaround during the latter half of the year, and important reports regarding U.S. employment made a positive impact on fears of a recession. Currently, we do not see any evidence for a U.S. recession within the next 6-12 months. 2019 enjoyed great performance year-todate in nearly every major asset class, and although there are legitimate reasons for the rally, we encourage investors not to get too comfortable. Now is an excellent time to review your financial plan and ensure the risk profile of your investments are aligned with your wants, needs, and capacity for risk.