Dear clients and friends,
At Perseus Wealth it is very important to us that you are well informed about what’s happening in the markets. Here is a brief recap of what has been going on over the last month or so and what we expect in the month ahead. As always, please call us with any questions.
What’s happening now:
- Fed Meeting – The Federal Reserve announced its fourth and final rate hike of 2018 on December 19th. While markets expected this hike, comments made by Chairman Powell about additional expected hikes in 2019 and 2020 and no indication that we are at or near “neutral rates” caused an equity market selloff. Interest rates should therefore continue to be a constant stress on the marketplace. However, in the near-term at least, the strength of the economy should help to carry markets upward.
- Trade War – The clock is ticking on the 90 days for the US and China to iron out a trade agreement. Minor steps have been taken but the tariffs already added by both sides are still in place. The stock market’s volatility has been heavily correlated with progress or lack thereof between the two sides. Market volatility should continue if no meaningful progress announcements are made, especially if no long-term agreement is in place by the deadline.
- Inversion – The 2-year and 5-year treasury yields recently inverted (the yield on the shorter-term bonds was greater than the longer-term bonds). This is a minor inversion (otherwise referred to as a “kink” in the rate curve) but may precede a more major inversion of the relationship between ultra-short-term yields and longer 10- or 30- year yields. Historically, a “5’s minus 2’s” inversion is not a reliable indicator of a recession; the “10’s – 2’s” inverted yield has more reliably predicted a recession in the U.S. However, even should that take place, the size of the inversion and its length of duration has significant importance as well. Finally, recessions that followed inversions have taken up to two years thereafter to occur.
- Inflation – The Consumer Price Index (CPI), which measures price inflation in the US, was unchanged in November at 2.2%. This number represents a comfortable level (the stated long-term target has been 2%) that should not be concerning in the eyes of the Federal Reserve. Low inflation and the historically low level of unemployment should warrant less Fed Fund Rates tightening if the Fed does, in fact, become more “data dependent” in 2019.
The month ahead:
The focus of the markets may well switch away from the Fed’s actions to the ongoing showdown over the border wall and/or trade conflicts (not just U.S./China but Brexit as well). Overall, the market’s sell-off appears to be overblown and stocks could start to recover as quickly as next month – but there will be continued bouts of volatility due to headlines. Starting in January, corporate earnings announcements may also be a catalyst to pull markets upward (downwardly revised estimates still are calling for mid-to-high single digit increases over this year’s record levels). If corporate earnings disappoint and aren’t in-line with the solid economic numbers, there may be cause for true concern about intermediate to long term market performance and future economic data.
The bottom line:
Current economic data (especially for the U.S) is stable and healthy. There does not appear to be any economic data that supports a near term recession.
John and Sean
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that any strategy will be successful.