By Christina Povenmire, MBA, CFP®, and Barry Jamieson, CFP®, MA
Last December, the US stock market went through a brief but noticeable downturn. For many market watchers, this seemed like the start of an overdue correction: valuations were stretched, interest rates were increasing, and the US-China trade war was escalating. Yet, here we are one year later, and the market is reaching new highs. What has happened to warrant this euphoria and how long will it last? Have the economic or market fundamentals changed so much to explain the highs today versus the correction of a year ago?
If anything, the economic fundamentals look worse than they did a year ago. Economic growth has clearly slowed both in the US and globally. Business investment and net exports have suffered due to the uncertain outcome of the trade conflict, which in turn has helped lower GDP in the US and the world. China has suffered more than the US from the trade war, because its economy is much more export dependent; however, since it is the world’s second biggest economy, the slowdown in Chinese growth has also had a marked impact on world economic growth and trade. Over the course of the year as the trade negotiations have waxed and waned, the stocks markets in turn have gone up and down. Currently there is hope that some limited compromise will be reached and that tariffs will either stay the same or go down; however, it is far from clear that even a limited agreement can be reached. Each side has much to lose if there is no agreement and the markets seem to be betting on the fact that compromise will be struck.
In the meantime, the world central bankers continue to provide ultra-loose monetary policy which has kept interest rates relatively low. The US Federal Reserve has lowered interest rates three times in the past year but has signaled a pause in further reductions. The US GDP has slowed to about 2%, but key economic indicators do not point to a recession occurring anytime soon. One of the positive factors supporting the economy has been consumer spending. Consumer confidence and spending remain strong bolstered by relatively low unemployment rates. An accommodating Federal Reserve, increasing consumer demand and a continued belief in a successful conclusion to the US-China trade war are the major factors behind the latest stock market rise. This rise seems less about rising optimism in the economy and more about relief that economic growth at least in the near term does not appear to be turning negative.
The key question remains: how long can both the economy and the stock market continue to increase? If consumers remain confident and continue to spend, perhaps the expansion might go on for another year or two. Confidence, however is fickle and can change quickly in case the economy has to deal with negative external factors (e.g. inflation or interest rate spike, war or threat of war) With all the political and economic noise that has filled the airwaves this past year, the stock market hummed to new highs increasing by 24% since the start of the year. With each new record comes the fear that a stock market drop is around the corner. Market drama is not worth losing sleep over! Let Christina or me know your concerns. We are committed to helping you achieve your long-term goals in good times and bad.