The two main factors driving the stock market in the last nine months have been concerns over monetary policy and the trade conflict between the U.S. and China. Just as we released our winter note, in February, the Fed had signaled that they would pause raising interest rates. In the months since, the market has already priced in two to three cuts by the Fed, which has inverted the yield curve. The Fed’s abrupt reversal from tightening monetary policy to their current “wait and see” approach has taken monetary policy concerns off the table as a primary concern for the market. Uncertainty around the Trump administration’s policies on a variety of issues like trade, tariffs, the blacklisting of Huawei, and the use of sanctions have emerged as the primary concerns for investors.
While the economy remains strong, concerns that ongoing trade disputes could lead to a global economic slowdown are growing. We see this reflected in lower equity prices and lower interest rates.
U.S. GDP growth in the first quarter was above trend for this expansion at 3.1%. The better than expected result seems to have come as businesses accelerated cross-border trade in anticipation of increasing tariffs. GDP growth for the second quarter is expected to slow considerably as the strength behind the first quarter is not expected to be repeated and as the effects of the fiscal stimulus of the 2017 tax cut work through the economy. The Federal Reserve bank of Atlanta’s latest forecast is currently 1.4%.
The heightened uncertainty around the Trump administration’s next move on trade with China, Mexico, Canada, and Europe, to name a few, appears to be slowing investment activity and forcing companies to question how they need to respond and plan in this environment. The costs of these tariffs will be debated for some time, but the longer the uncertainty persists, the greater the impact it will have on global economic growth.
Taking a step back from the financial press and the relentless stream of headlines, it is important to remember that economic growth never unfolds in a linear fashion. Just like a marathon runner may slow down for a few miles mid-race to recover from an initial exertion, it is natural for the pace of economic growth to vary during an expansion. The uncertainty described above is always present in one way or another for investors. As we navigate our way through this environment, it is important to maintain a long-term perspective and monitor risks by paying attention to the asset allocation in portfolios.
On Pace to Break a Record
Assuming the current expansion lasts through the summer, this will become the longest U.S. economic expansion on record. As we mentioned in the beginning, the Fed has already paused its interest rate hiking cycle and its next move is widely expected to be a cut. If the expected slow down occurs and begins to show up in the economic data, the Fed will have to give the markets what they are expecting: monetary stimulus. This anticipation of an interest rate cut—along with hope for any sort of trade agreement and lowering of tensions between the U.S. and China—are the reasons the U.S. stock market remains near its recent record highs.
Hope is not a Plan
At Cornerstone Advisory, it is our business to prepare for the unforeseen. While the pace of news headlines can be dizzying and the current challenges we face may seem daunting, we remain committed to our process and discipline. We also take some comfort in the fact that our research has identified alternative sources of return beyond the traditional equity and bond markets.
As always, if you have any questions or would like to have a conversation, please reach out to us or your portfolio manager.
The Cornerstone Team
Disclosure: Cornerstone Advisory, LLC, is registered as an investment adviser with the SEC. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals, and economic conditions may materially alter the performance of your portfolio.