Third Quarter Commentary 2019
If you ever want to know what a “normal” year in the stock market looks like, this is it. It seems that every year since the Great Recession was unique – which makes this “normal” year so unusual.
In a typical year, the market rises during the end-of-Winter and Spring. As Summer rolls around, the market starts to see dips that continue through August or September. The end of the year typically sees the market regaining its forward momentum.
This is exactly what’s happened this year. Virtually all of the gains within the stock market occurred between January and April. Since then, the market has moved sideways – sometimes more severely than others. August was one of the uglier months. The gains you will likely see on your September statements make up for much of these downturns.
Over the Summer, recession fears abounded with concern over the economy and trade negotiations. Both the stock market and interest rates were down.
Since then, we’ve seen both the market and interest rates rise. Although not everyone is as confident as investors. The Federal Reserve voted to lower interest rates twice in recent months. This is frustrating on two levels.
The Fed & Interest Rates
First, the Fed seems to be moving against the general consensus. It can be dangerous to lower interest rates when the market is planning on them rising.
In addition, the main weapon the Fed has to help mitigate a recession is lowering interest rates. If interest rates are too low, they don’t have the necessary room to help lessen the effects of a future recession.
As you know, I’m not a big fan of the Fed in recent years. In my opinion, they look too much at the very short term and ignore the long term.
This has manifested itself in rates that I believe are still too low. (Although it does accomplish the goal of artificially propping up the real estate market.) On top of that, they have been slow to reduce the size of their balance sheet.
If you recall back in 2009, the Fed began buying Treasury Bills and Bonds. It’s basically a shell game the government played to keep interest rates low during a particularly difficult recession and recovery. (Because the government can’t borrow money from itself, can it? The Fed buying Treasury Bonds is like you moving your money from your left pocket to your right.)
Our problem is that the Fed still owns nearly $4 trillion in bonds. While I don’t believe they’ll use the extreme strategy of bond buying to help in the next recession, owning too many bonds means that if a future recession hits, another potential tool in the Fed’s toolbox is off the table.
More Interesting News
Recent data from Uncle Sam has shown that the personal savings rate is rising. Again, on the whole, this is great news. Our country played a dangerous game of relying on consumer credit to fuel expansions for the better part of four decades. That trend seems to have stopped. Too many consumers felt the sting of the Great Recession and don’t want to repeat the experience they had during that time.
There is a downside to increased savings. It wouldn’t seem that way, would it? But there is a problem with too much savings: It means less consumer spending. And more spending by consumers can accelerate economic growth. This means the slow growth we’ve seen in our economy may continue for the remainder of this economic cycle.
The long-term effects of the savings rate are very positive. More Americans will have more resources for retirement. In addition, we are seeing people creating and funding “rainy-day accounts.” With more money set aside for a an emergency, more people should weather the next recession more easily.
Looking Forward
As we look to the remainder of 2019 and on to 2020, I see no significant obstacles to the economy. Employment growth is showing signs of slowing down, but that is a trend that is better seen over many months. And as we’ve discussed before, we have not seen significant wage inflation that should be manifesting itself at this time in the economic cycle.
Consumer spending seems to be positive. And consumer confidence is up as well.
Clearly the trade negotiation with the Chinese is having some effects on the economic data. Some of it is real: Some goods cost more because of tariffs. But some of the effects are perceived: Consumers and business owners alike are leery of expending money when there is uncertainty with our trading partners. This in-and-of-itself can lead to slower economic growth.
All that said, I expect that a deal will be reached – even if it is a no-change deal. The last thing the President and China want is increased tariffs – it does harm to both economies. This is despite all of the rhetoric both sides throw at their opponents.
For now, I see no changes in the portfolios that I manage. If you are a SMS client, you may have seen some trades in the past few weeks to take some profits in a category or two. If you did not see trades, it’s because we took care of it under a normal course of business over the Summer.
Thank you very much for your time and your support. Donna, Anna and I wish you a safe and wonderful Fall and all that it brings. If you have any questions regarding the economy, your portfolio or any other financial issue you are facing, please feel free to give us a call or email me at dennis@successfulmoney.com. We are here to help you.
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This blog is the opinion of Successful Money Strategies, Inc. and is provided for informational purposes only and is not intended to provide any investment advice or service. Statistics and other figures are accurate at the time of original publishing. Any advice herein should not be acted upon without obtaining specific advice from a licensed professional regarding the readers own situation or concerns. Always count your change.