We began this year with the market expecting a recession because of three primary concerns: uncertainty surrounding the Federal Reserve’s interest rate decision, escalating U.S.-China trade tensions and deteriorating global growth.
However, the odds of a recession have lessened somewhat since then1 as stock markets rebounded substantially from the losses sustained in the fourth quarter of 2018.2
While the majority of the returns have likely already been captured in 2019, we believe there is still opportunity to earn positive returns in our equity portfolios through the remainder of the year. As we enter the fourth quarter, we are keeping our eye on three factors impacting the market:
1. U.S. dollar: Not too long ago, many investors were concerned that the U.S. dollar would fall out of favor when the International Monetary Fund (IMF) introduced the Chinese yuan to its basket of reserve currencies.3 Fortunately, this has not happened. The U.S. dollar continues to drive global decision-making and asset flows, and as such, has moved higher over the last five years.4 While this is welcome news for U.S. consumers, it has caused some issues for U.S. exporters, international assets and global economies that issue and repay debt in U.S. dollars. We will be closely watching the movement of the U.S. dollar moving forward as it affects our purchasing power and the returns of international assets.
2. U.S.-China trade negotiations: There have been costs to both the U.S. and China stemming from recent trade disputes. Recent reports show that U.S. manufacturing moved into contraction territory for the first time in three years5, and that China’s economy is slowing.6 For these reasons, it is still in both parties’ best interest to reach a resolution. The question is how long it will take to do so. The market looks like it is expecting measurable progress within a year, and though it would certainly applaud a speedier resolution, it also has room to decline if there are further delays.
3. Strength of the U.S. consumer: Unlike the government and corporations, the American consumer has refrained from carrying too much debt since the financial crisis.7 Instead, they have spent the last 10 years increasing their savings and improving their overall financial situation. This welcome consumer discipline has helped ward off serious recession threats and supported the stock market’s bull run. Throughout the rest of the year and into 2020, we will continue to monitor the health of the consumer. If consumer confidence and spending power remain strong, we will likely avoid a recession. If we see these measures decline, that may indicate a possible economic downturn on the horizon.
Despite this consumer strength, there has been a lot of investor concern about volatility over the last year. In this expansion cycle, we’ve seen an average of two to three pullbacks of 4 percent or more each year.8 So far in 2019, we have had two 6 to 7 percent pullbacks2, which is in line with historical averages.9 If history holds, we will likely see another single-digit pullback in the fourth quarter. However, these pullbacks should not influence our long-term investment strategies. It is this very same volatility that provides investors with the higher expected returns needed to grow their assets and purchasing power.
1. Seeking Alpha – Odds of U.S. recession before August 2020 rise to 1 in 10
2. Yahoo! Finance – S&P 500
3. Reuters – China’s yuan joins elite club of IMF reserve currencies
4. CNBC.com – The US dollar just hit a two-year high and is threatening to make another major milestone
5. CNBC.com – US manufacturing contracts for the first time in three years amid China trade war
6. CNBC.com – China’s economic growth may be looking at another rough quarter
7. CNBC.com – Consumers are America’s not so secret weapon to keep economy afloat, but they can’t save the world
8. Exencial Wealth Advisors research
9. CNBC.com – Grading the market: A routine pullback or has the trade war damned the S&P 500 to a trading range?
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971