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.
2020 Continues its pace from 2019
What’s going on?
Although the decade came to a close at the end of 2019, the economy, which began its current expansion over 10 years ago, continues to move forward with growth. U.S. consumers continue to serve as the backbone for the U.S. economy, as wages and inflation grew at a similar pace during 2019, and unemployment rates continue to fall one decimal place at a time. The most important sources of information that caused the largest swings in major markets over the last year, such as interest rate changes from the Federal Reserve, as well as trade disputes between the U.S. and China have found resolve, even if temporary. Furthermore, military conflicts between the U.S. and Iran as well as major government votes such as the U.K.’s “Brexit,” were seemingly shrugged off by markets, which signals that investors have conviction in the current strength of their investments.
Why is it important?
At the end of 2018, the S&P 500 touched -20% from its all-time high as tariffs and other economic data sent markets into a selloff. Going into 2019, when positive economic data was released, the market would sell-off in anticipation that the Federal Reserve would raise or hold interest rates. If negative economic data was released, the markets would rally in anticipation of the Federal Reserve lowering interest rates. We began to label these movements as “opposite days,” which can be confusing for even a savvy investor. Over the course of 2019, the economy seemed to hit a soft patch and concerns increased until early October and in response, the Federal Reserve cut interest rates three times by 0.25%. As economic data began to recover at the end of the year, the Federal Reserve made it clear that they were no longer interested in changing their interest rate policy, and good economic news became good market news once again.
What do we think about its potential impact? Although markets have recently reached new all-time highs, it’s important to note that it doesn’t mean that forward returns will be lower. In fact, about 80% of the time, the S&P 500 has positive returns one year following a new high (1). Therefore, we should focus on the context of the market environment as we consider the possible impacts of future information. Now that the Federal Reserve has taken a break from raising rates, the economy has recovered from its soft patch, and phase one tariff agreements between the U.S. and China have been completed, all eyes will be on continued economic data releases as they relate to the consumer well as corporate earnings which will need to grow in order to support the price expansion of 2019.
The month ahead:
We will be closely evaluating the sensitivity of the market, both in equities and fixed income, to future economic and corporate data as they are released over the coming month. Earnings releases from corporations will be an important component of the ongoing price movements, and the consensus from analysts currently project a return to growth over the course of 2020 (2). If earnings come in below expectations or the consumer begins to show signs of weakness, then we could see some contraction in the markets and volatility could increase. However, if positive data continues to be published, then we anticipate the market to climb higher.
The bottom line:
2019 was a great year for returns in almost every major asset class. Therefore, many investors may feel reluctant that the performance can continue. However, we feel that it is important to frame the current market with the context of its environment as well as its price to better understand the possibilities ahead. We have finally escaped the “opposite days” of 2019 and will continue to monitor key sources of data and the markets they impact as they are released. At this time, we do not have a concern about the possibility of an economic recession within the next 6-12 months.