CMP Financial Planning

Economic and Investment Update: (1st Quarter through February 27, 2019)

By Christina Povenmire, MBA, CFP®, and Barry Jamieson, CFP®, MA
What a difference a quarter makes! In December I was lamenting that our long bull market was coming to an end. In that month alone the S&P stock index declined 9%. Trade tensions with China were rising and looking to boil over into an all-out trade war. Interest rates were anticipated to continue to rise throughout 2019. Company valuations appeared to be stretched. But then, with the beginning of the New Year, stocks began and have been rising steadily.  What happened in that really short period of time to justify such a swing?
The biggest change that has occurred since December is that the stock markets are no longer anticipating any interest rate hikes from the Federal Reserve. The markets had been afraid that interest rate hikes would have greatly slowed the economy or even brought on a recession; however, Chairman Powell of the Federal Reserve began communicating in January that the Federal Reserve would be flexible in its interest rate approach and would not be in a hurry to raise them.  Another change that has occurred, at least in perception, is the tenor of the US trade talks with China. President Trump is now tweeting that there has been substantial progress in trade negotiations with China. Tariffs that were set to rise by 10 to 25 percent without an agreement have been postponed. Markets are anticipating some kind of agreement between the world’s two largest economies soon. 
Finally, there is the status of the real economy and company earnings. Markets had been concerned about the degree to which the US and world economy was slowing, thus directly affecting corporate profits and thus stock prices. Although the US economy is slowing from the 3% to 4% annualized growth rates of the 2nd and 3rd quarter of 2018, many forecasts show 2019 US growth still exceeding 2% (The International Monetary Fund for example expects forecasts for US growth of 2.5%.)   The growth in US labor nonfarm payrolls increased by an eye popping 300K in both December and January, impressive growth figures for an economy in its tenth year of expansion.  Fourth quarter company earnings, while down from the 3rd quarter, are still growing by double digits; 61% of companies reported stronger than expected revenue for the quarter. 
Did markets then simply overreact to the negative news that it was trying to absorb at the end of the year?  Perhaps.   Many of the same factors that have been weighing down on stocks for months, however, still exist (e.g., global economic slowdown).     The pause in interest rate hikes by the Fed may have bought some time as to when the next recession hits, but every expansion usually exhibits big volatility in the final months or years before it finally does come to an end. Although many of you are prepared for another market correction, each sustained downturn still can hurt. Remember that your financial plan has built in a significant temporary decline in your portfolio resulting from a market downturn.  Let Christina or me know if you have questions or concerns about your financial plan.