April 2019 Market Commentary
Market Commentary: Markets up, profit margins down
Written March 20, 2019
This has been a fascinating six months in the market and global economy to say the least. We’ve seen investor greed turn to fear and then back into greed. The Federal Reserve has flipflopped from raising rates to halting those rate hikes due to a visibly slowing US economy, and the two-step that is the China-US trade talks. The European Union is experiencing their own history in the making with the UK on course to leave at the end of this month with no extension and no plan. According to the UK government’s assessment, such an outcome could result in the UK economic decline of 6.3% to 9% in fifteen years compared to what it would have been. That would likely cause a ripple effect throughout Europe and the rest of the world at a time when the Eurozone’s GDP forecast has been reduced to 1.1% for 2019.
But you wouldn’t know that anything is amiss in the global economy by looking at the US stock market. After being down nearly 20% from its high, the S&P 500 has regained considerable ground in 2019, up 13.5% year-todate. At this rate, the S&P would be up over 50% by the end of 2019.
With deteriorating fundamentals, is now a good time to buy? According to CNBC’s headlines, the answer is yes. After all, a slowing economy means lower interest rates, which is a positive. If President Trump can get a deal done with China, that will be good news. The European Central Bank will step in if things get too rough over in the Eurozone, right? So let the good times roll.
Are headlines a good indicator of where the stock market is headed? Calendar year 2009 saw the S&P 500 soar over 26% and kicked off a nine year stock market winning streak. For fun, look below to see what was being printed March 2009.
So during the absolute best month to buy in the last two decades, everyone said to sell. And when everyone says to buy? Well, I think that’s usually a good time to take a look around to see what’s really happening outside instead of letting other people tell us what to do.
And what we see are increasing risks of a slowing economy. Earnings growth peaked in the 3rd quarter of 2018 and slowed in the 4th quarter of last year. Profit margins also fell sharply. We haven’t seen an abrupt slowdown like this since 2007.
Does that mean a recession is eminent? It’s too early to tell, but even so, we think this rally is unsustainable in the current economic environment and have become more defensive in our clients’ managed accounts. If 1st quarter earnings and other economic fundamentals continue to show signs of slowing, we may see a recession as early as 2020. We’re keeping a close eye on these indicators and how they develop over the next few months.**
- Victoria Bogner, CFP®, CFA, AIF®
**The views are those of Victoria Bogner and should not be construed as investment advice. All information is believed to be from reliable sources, however, we make no representation as to its completeness or accuracy and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation. Economic and performance information is historical and not indicative of future results.
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