One Busy Week and a Positive Market Outlook

By David Lee Smith, Ph.D

Prediction

Good rest of 2019 and moderately optimistic for 2019

Bullet Points to Support Prediction

  1. Fed cuts rates
  2. GDP growth remains moderate
  3. Strong corporate earnings
  4. China deal looking better
  5. Fourth quarter historically good

Discussion

For mavens of the markets and the economy, the last week of October – and November’s first day – made for a time of essentially nonstop releases of data from which to forecast the future of U.S. financial trends. Indeed, beyond the data sat an undercurrent of geopolitical intrigue that likely will have its own effect on those same trends.

The Fed Slices Again

Easily the single key event of the week occurred on Wednesday (October 30) when, following a two-day meeting, the Federal Reserve cut interest rates for the third time this year. Its new target is 0.25% lower to a range of 1.5% and 1.75%. The move had become highly anticipated. In fact, long before it was announced, the major remaining question had become one of the committee’s likely action when it reconvenes in December. To that query, Fed Chairman Jerome Powell clearly gave economists something to go on when he noted that “The current stance of policy is likely to remain appropriate…”

The stickiness of that stance will obviously depend in large part on the ongoing strength of the labor markets. In that connection, Friday brought with it the news that those markets are currently humming along nicely. Specifically, the November 1st lookback at October jobs growth resulted in a report that a solid 128,000 jobs had been created during the month – considerably more than had been expected – and that additions in August and September had been better than initially reported.

GDP Heads North

Sandwiched between the Fed’s action and the jobs report was Thursday’s disclosure that the nation’s gross domestic product had grown at a rate of 1.9% during the third quarter, a slight dip from the 2.0% in the second stanza. As in the recent past, the engine powering the growth clearly was the consumer sector. Consumers are carrying more than their share of the spending load, and they’re clearly unfazed by the figurative emphysema that continues to beset manufacturing and business investment. It’s noteworthy, however, that households are hardly spending their lucre at a rate that matches last year. And so, while a recession seems unlikely at this juncture, fourth quarter GDP will almost certainly come in somewhat below the levels of the past two periods.

The markets looked especially kindly on the jobs numbers, but they’ve also been heartened by the results of the current earnings season, which has been considerably stronger than might have been anticipated. Indeed, as The Wall Street Journal told us on Friday, “…about 75% of the 342 companies in the S&P 500 that have reported earnings through Thursday morning have beaten expectations…”

The Expanding Importance of China

Then there are the international issues, which are primed to affect the markets either positively or negatively, depending on one’s perspective and the precise timing of their observations. The delicate importance of timing was demonstrated aptly on Thursday when the markets appeared to be in a funk at the outset of trading – based clearly on skepticism about progress (or a perceived lack thereof) in the U.S.’s trade talks with China.

A couple of hours into the session, however, a report bearing optimistic comments about the negotiations from a Chinese official clearly boosted traders’ sentiments measurably. In any event, there appear to be reasonable prospects for an agreement between the Trump administration and that of Chinese President Xi Jinping. The real question requiring something of a suspension of beliefs will involve the likelihood that whatever pact emerges from talks will hold over time. To presuppose lengthy fealty to any agreement may be to categorically ignore China’s history.

And Our Final Conclusion Is…

All of the above is at least modestly positive as it relates to the probably short- and even intermediate-term prospects for the markets. As my colleague George Parks points out, historically the fourth quarter has been good for stock prices. And he has also observed that equities still appear to be better priced than bonds. That’s especially the case following the Fed’s latest action.

George also makes another seemingly appropriate observation: Trade tensions between the U.S. and China may just be the new normal. He’s almost certainly correct, as would be one who rendered the same observation about softness among the European economies and chaos in the Middle East. Nevertheless, given today’s sanguine nature of investors about their economy, along with our own relative preference for equities, we’re predicting a solid remainder of 2019 for the markets. And, absent any election-based upheavals during 2020, we currently expect a generally positive year to follow.

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