The Current Wall of Worry
Perspective is helpful when considering why the stock market moves the way it does.
For the second half of 2019 we enjoyed a nice move up in the markets as the concerns taking front and center such as FED rate decisions and Trade with China and others continued to ease allowing investors to see more positives in the market than negatives.
January continued the uptrend until the past week or so – as the clouds hanging around have now, at least for the short-term led to a flight toward safety. Why have the negatives turned the tide? Although no one understands this perfectly – considering the “why” behind market moves can help us make wise decisions. Below we have summarized some of the elements investors seem to be focusing on.
Positive Characteristics
Earnings as a whole – coming in very positive
Inflation has remained low historically
Interest rates remain low by historical standards
Continued benefits from the tax cuts
Consumer confidence continues to improve (strong consumer relatively speaking)
GDP gradually improving
Economy is strong – as is the job market / unemployment
Trade deals beginning to materialize
Let’s look at some charts that illustrate these positives:
As you can see in the chart above, the current inflation rate is low relative to historical standards.
US Long-Term Interest rates remain close to all-time lows – lower rates have historically been very good for stocks.
Consumer Sentiment levels reflect a strong consumer, which is a major driving factor of the US economy.
The value of this chart is a little trickier to understand at a first glance. However, the story it tells us is fascinating. The purple line in the upper section shows us the total non-farm job openings. We can see that the total number of unemployed job seekers dropped below the total number of job openings, then a few months later, the total unemployed persons (not just the ones seeking jobs) also dropped below the total job openings. This means there are more job openings than there are people looking for jobs. We believe this indicates room for the US workforce to continue growing, even with unemployment sitting at record lows. We believe this to be fundamentally positive for the US economy.
The lower portion of the chart shows us that in 2012, there were roughly 3 job seekers for every job opening. Whereas today, we're looking at roughly 0.7 job seekers for every job opening, another visual of an economy running on all cylinders, which also speaks to why consumer sentiment is at relatively high levels.
Negative Characteristics in Focus
CoronaVirus Outbreak – Fear and anxiety as to the unknown and potential for loss weigh heavy on investors. Last week, travel began to be restricted between China and many other countries. One of the major Global concerns is that this will begin to slow trade further due to disruptions to supply chains, as a result of the travel restrictions and restricted working conditions in the areas of origin.
Tariffs still playing a role in some trade disputes.
Impeachment – at the very least, clarity here will eventually be a positive.
Simple fact that many investors did not sell late in the year last year for tax reasons and it is to be expected, as we noted in our December blog, that some re-balancing and profit taking would more than likely happen in this quarter. There is always a trigger and perhaps this year it is the Virus.
So, what now?
It’s important not to overreact to these type of conditions – and yet we do need to take it very seriously and utilize sound portfolio management rules to guide decisions in a time like this. Time will bring clarity to these situations and as that happens, more certainty to each category will come into focus. Uncertainty is the market’s enemy and for good reason. However, with the exception of the Virus, we have much to cheer about when it comes to our economy.
We expected a correction at some point this quarter and believe it is very healthy for many reasons including the simple fact that multiples should come down in the face of something like the CoronaVirus that has the potential to disrupt supply chains leading to slower growth. As slower growth is priced into valuations it is normal to see some lower prices in stocks.
Future – it is also normal to see higher prices as uncertainty begins to clear up. If and when we see the Virus concerns relative to understanding and treatments begin to be contained – we would expect to see the market reflect just that.
Authored by: Michael McCracken CFP®, ChFC and Jeffrey Gardner, Financial Advisor The information presented above has been prepared for informational purposes only and the commentary represent the opinions of the author and are subject to change at any time due to market or economic conditions or other factors.