Market Commentary: Despite China, Economy Has A Strong Chance to Strengthen in Back Half of the Year

Low inflation has been perplexing to the Fed forecasters for years and is giving this Fed all the ammunition they need to stand pat on rate hikes.

Market Commentary: Despite China, Economy Has A Strong Chance to Strengthen in Back Half of the Year

The Situation

December 2018 Google searches for “recession” hit the highest they’ve been since November 2009. It’s no wonder considering the deluge of negative headlines on trade wars, the Fed, the global economic slowdown, bear market levels on the S&P 500 and the government shutdown.  The psychological effects from the negative headline environment resulted in business leaders and consumers both contracting their spending behaviors.  

We believe economists are underestimating the strength of the U.S. economy and GDP will surprise to the upside for 2019: Current Conference Board GDP is at 2.4% and we believe GDP will be closer to 2.8%, perhaps even eclipsing 3.0%.

The Federal Reserve: Uncertainty has been removed

Low inflation has been perplexing to the Fed forecasters for years and is giving this Fed all the ammunition they need to stand pat on rate hikes. We believe the committee did an excellent job at the last meeting in staying neutral and continuing to pause and watch the data. Despite the bond market increasingly pricing in a cut, we believe the economy will surprise to the upside and the Federal Reserve will look wise in not acting too quickly. We are watching the dollar and believe stability in the currency will be important for our forecast to materialize in 2019.

Trade Wars Forward Progress: Uncertainty is rising but market is pricing it better

Breakdowns in trade talks between the U.S. and China have led to market selloffs, but that could be a blessing in disguise. Before the disagreement, markets were getting a little too giddy and we began to fear that even an agreement would lead to a sell the news type event. Now there is almost no one who thinks a deal could be done anytime soon and we are back to an environment that is at least in line with reality and at best overly pessimistic. Behind that backdrop, the risk-reward is more enticing to us here than it has been in awhile as several individual names sold off more than we believe warranted. Making a deal in the face of the pessimism would also line up much more with President Trump’s public relations M.O. than the much-choreographed deal we seemed to be headed for before the breakdown.

U.S. Job Marker Outlook: Uncertainty remains low, will face severe constraints due to skills gap in 2019  

The April jobs report was conclusively strong. Although jobless claims have increased in the past several weeks, we believe it’s not likely to evolve into a longer-term trend. We are watching labor productivity rising at its fastest pace (3.6 percent) since 2014. Higher productivity is very important at this stage of the tighter labor market (unemployment rate 3.6 percent), thus keeping wage inflation in check and the Fed more comfortable in their inflation outlook. 

The Takeaway

We believe we are coming out of a very high level of uncertainty in Q4 2018 created by trade wars, the Fed, the global economic slowdown, bear market levels on the S&P 500 and the government shutdown. This had a negative psychological effect on business and consumers and pushed them to change their spending behavior in the first part of the year.    

We have clearly seen this translate into weakness throughout PMI surveys and consumer spending data in the first four months of the year. We believe this weakness will be transitory as many of the uncertainties that initially created this behavior continue to fade into the headline distance. 

The Fed is sending the right message to the markets in 2019 vs 2018 and the U.S. job market will allow consumers to feel more confident overall, translating into continued progress in consumer behavior leading to a stronger housing market and improved retail sales for the remainder of 2019. A change in the business community psychology could evolve slower than consumer behavior. 

Although the current Fed policy should be a positive for business leaders behavior change coming out of Q1, the trade war and tariffs continue to hang uncertainty over capital investment on a global scale. 

That said, trade talks will most likely resolve some issues over the next few months. With mortgage rates falling, we believe housing will be a bright spot as most economists had left that industry for dead at the end of 2018. The Fed will continue to be data dependent and the U.S. job market will remain strong resulting in stronger business and consumer spending and GDP for 2019.

Disclosures

Securities and advisory services offered through Centaurus Financial, Inc., member FINRA and SIPC, a registered investment advisor. Centaurus Financial, Inc. and First Franklin Financial Services are not affiliated companies. This presentation is for educational purposes only and is not intended for investment advice or a solicitation of services.