An improving US consumer, recovering yield curve, and trade progress drive the market higher in November.
What’s going on?
- Following the Fed’s decision to reduce the Federal Funds Rate by 0.25% in October, U.S. markets continue to enjoy hitting new all-time highs, as economic data continues to hold steady (and in some cases improve) surrounding labor, consumption, productivity, and sentiment.
- Despite the cut in short-term interest rates, the yield curve is slowly returning to normal and is no longer “inverted.” This will ease the burden on the global banking system and credit markets but will likely bring rising mid to long-term rates and falling bond values.
- Finally, Global sentiment surrounding trade talks between Beijing and the U.S. have begun to improve as well, as reflected by reports of industrial spending in international domains. We remain cautiously optimistic a deal can be signed within the next six months.
Why is it important?
- An inverted yield curve and slowing global trade are common symptoms of a looming recessionary environment. In early 2019, economic data in the U.S. began to soften along with most international reports. The data continued to appear worrisome through the summer as trade conflicts escalated and global banking struggled.
- Although some recent economic reports came in below projections, such as industrial production figures, the strong U.S. consumer coupled with low inflation continues to be a main driver for the U.S. economy going into the final quarter of 2019.
- As the topics mentioned above improve, the odds of extending the bull market grow.
What do we think about its impact?
- The trade war between the U.S. and China has dominated many of the market headlines for quite some time, and the issue spread into other key areas of economic health, such as the Federal Reserve’s interest rate policy. Heading into an election year, we anticipate the Trump administration to push for policy which will reward the economy. With the most recent developments on trade “coming down to short strokes,” as reported by White House officials, there may be additional tailwinds behind the current rally. Retail sales in October grew by 0.3%, ahead of the anticipated 0.2%, a reversal from September’s miss and a positive sign for the economy as we head into the holiday shopping season as the consumer is responsible for two-thirds of GDP growth.
The month ahead: Last year during this time, the market went through a phase of increased volatility which lasted until Christmas and wiped out the entire year’s gain. However, fast forward to today and progress from many of the issues which caused last year’s volatility are contributing to the current price appreciation in both foreign and domestic markets. We will be monitoring key reports from international industrial companies as a helpful signal as to whether they believe trade progress to be substantial.
The bottom line: As we head into Thanksgiving, we are grateful for the recovery in economic data as the fears of a recession in the next 6-12 months have been diminished further. The current environment of low inflation, a fully employed workforce, a positive sloping yield-curve, and increased trade progress between China and the U.S. are moving markets further upward into new all-time highs. However, the current economic cycle is long in the tooth when compared to other historic expansions and can be sensitive to any surprises that may arise. We will continue to monitor important sources of information as they are reported and adjust strategies accordingly. We remain confident in our asset management philosophy of implementing a diversified ecosystem of quantitative strategies.
Financial Advice is offered through Mid Atlantic Financial Management, Inc. (MAFM) a Registered Investment Advisor. Tempus Advisory Group is not a registered entity or a subsidiary or control affiliate of MAFM. The information contained in this e-mail and in any attached files is confidential and intended for internal use of the individual named in the email. This information should not be duplicated or distributed unless an express written consent is obtained from Tempus Advisory Group in advance. If you are not the intended recipient, please notify me immediately and delete any attachments. The views expressed here reflect the views of the Tempus Advisory Group Investment Committee as of 11-18-2019. These views may change as market or other conditions change. 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.
