Time for a Pause?
After the January/February market rebound, we see gains harder to come by for US markets. Prospects are somewhat better overseas, but not good enough on a risk reward basis to expand our commitment at this time.
The slowing growth we alluded to above is manifest in the Gross Domestic Products data. For 2018, GDP growth was approximately 3%, a level not seen since 2005. But the first estimate of 4th Quarter GDP was +2.6%. As a standalone number, that number is not bad.
It’s the trend that is concerning, and the 1st Quarter 2019 projects to be considerably slower. “We’re at 1.5 percent. We’ve got a slowdown in the first quarter, hopefully from transitory affects from the government shutdown and polar vortex,” said Diane Swonk, chief economist at Grant Thornton. Others are slightly below one percent. “Hopefully there will be a snap back in the second quarter,” said Swonk who expects 2nd Quarter growth at about 2.5%”
We may be in for a technical pause in the US stock market after the gains of the first two ½ months. With the slower growth outlook, earnings are under pressure in many industries and valuations are higher after the run-up. FactSet is currently projecting a slight decline in earnings growth for the 1st Quarter; this would be the first decline since the second quarter of 2016.
It is not unusual for the economy to sputter a bit during the winter months. That may lead to some volatility, but there is no reason for the market to fall out of bed with a projected return to about 2.5% growth for the 2nd Quarter and beyond.
Fact: In 25 of 27 years since 1950 that the S&P 500 showed gains in the first two months of the year, the market rose during the last 10 months of the year.
Many fund managers that we hear from are bullish on emerging markets, based mainly on the positive sentiment surrounding the trade deal with China. The Chinese government is stimulating the economy (although this time against a backdrop of deleveraging) and money is flowing into their equity markets due to an increased weighting for China as part of an index adjustment by MSCI.
The US dollar could hold the key to international funds. The dollar has been stronger than expected lately, hurting returns for these funds. The key factor is the interest rate differential, and US short rates are currently higher than anywhere in the developed world. Investors are paid more to hold dollars. Whether the pause by the Fed affects the equation is unclear.
We feel markets will be higher by year end, but will not get there by a slow/steady increase. There will most likely be significant volatility throughout the year but we feel patient investors will be rewarded.