At 401(k) Engineers, it is very 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.
- Fixed Income – In late March, we saw the 90-day Treasury yield drop below the 10-year Treasury yield for the first time during the current economic expansion. This phenomenon is referred to as a “yield curve inversion” and has preceded every recessionary environment in modern times. However, this yield curve inversion was short-lived and recovered in early April. As global buying pressure on high quality bonds and 10-year Treasury continued into May, we watched as the yield curve inverted for a second time. Although for many investors a yield curve inversion sparks fear of a recession, this data is remarkably different. When we pair the Federal Reserve’s activity of raising short-term rates, with the downward pressure of global demand on long-term rates, we do not feel that the recent yield-curve inversions warrant a high risk of recession in the next 6-12 months. If additional portions of the yield curve invert, such as the 2-year and 10-year Treasury yields, then we will have a greater cause for concern. The Federal Reserve has stated that they do not anticipate raising short-term rates soon, which could help provide room for long-term rates to remain attractive for both domestic and foreign investors.
- Equities – After a strong start to 2019, the S&P 500 incurred its first bought of volatility in May. Much of the pullback has been attributed to heighten fears of a renewed battle in the ongoing trade dispute between the US and China. In prior month’s economic updates, we stated that it would be reasonable to anticipate some volatility as the S&P 500 surged nearly 20% from its December 2018 low into new all-time highs in late April and into early May. When we look at the S&P 500 going back to 1990, we can see that 5% corrections occur a little more than three times per year on average (1). Therefore, we remain cautious in the near-term as pullbacks are commonplace in the stock market. However, there are many positive indicators in the market that can potentially pick stocks back up from being slashed down. Some of these indicators include but are not limited to S&P 500 companies beating lowered profit expectations, labor markets remaining tight, inflation hovering at ~2%, GDP holding steady, and the Federal Reserve continuing its accommodation to the economy.
- Economic – On March 10 th , U.S. Representative Robert Lighthizer released a statement which announced the US’ formal intent to raise tariffs on $200 billion worth of goods from 10% to 25% (2). The announcement follows the January 1, 2019 deadline which was extended into March, and then extended further on into May as trade negotiations seemed to be making progress between the two governments. Due to the potential for tariffs to negatively impact American companies as well as economic growth domestically and worldwide, many are hopeful that previous meetings do not lose their momentum towards a resolution between the two parties. When it comes to trade tariffs, enforcement of rules and deadlines can be as important as the agreements themselves. Therefore, we view the tariff announcement as a signal that the US is serious about their deadlines which may encourage the Chinese to continue the course of resolution at its next big opportunity in June at the G20 meeting in Japan. Overall, the US economy continues to look healthy as productivity, payroll, and wages signal a strong labor market. Consumer spending is responsible for nearly two-thirds of the US GDP (3). Labor market strength has been at the center of the current economic expansion, and an increase in productivity is helpful for companies as wages and job creation expands at a healthy rate.
Looking Ahead: Trade agreements between the US and China are back in the spotlight, and we are hopeful for a resolution between China and the US in the coming months. Many leading economic indicators show that the US is in a healthy economic condition (4). Moving into the latter half of Q2, we will keep an eye on labor markets and business sentiment as a helpful read on the current business cycle. Equities may see some consolidation in price in the near term; however, when we contrast with the historical performance of the market, spouts of volatility should be expected as commonplace.
Bottom Line: The beginning of 2019 saw historic performance for S&P 500 returns which eclipse previous all-time highs from 2018. Headwinds for continuing the S&P’s upward trajectory include but are not limited to uncertainty surrounding trade. Whereas tailwinds are being provided by a strong labor market, an accommodative Federal Reserve, and low expectations for profit and earnings growth. We believe volatility could continue in the near-term until trade issues are resolved. Overall, we do not anticipate a recession in the US economy during the next 6-12 months.
The views expressed here reflect the views of Brian Peardon. These views may change as market or other conditions change. Actual investments or investment decisions made by Cambridge Investment Research and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Moody's Corporation is the holding company that owns both Moody's Investor Services, which rates fixed income debt securities and Moody's Analytics, which provides software and research for economic analysis and risk management. Securities offered through registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a registered Investment Adviser. 401k Engineers and Cambridge are not affiliated. CA Insurance Lic. #0E44645