Second Half Outlook 2019
Markets are off to a strong start through the first 6 months of 2019. Read to find out what our experienced team of financial advisors and financial planners attribute this success to, and how they see the rest of the year unfolding.
"As we roll into the second half of the year, neither recession nor material overheating conditions are imminent."
We still expect positive US economic growth but more of a mixed outlook for foreign economies. Given the outlook for slower global growth this will likely contain inflation within a moderate range.
The US economy has decelerated relative to last year, but exhibits extremely low unemployment, low inflation, strong household balance sheets and wage growth above trend.
The case for a gradual easing of interest rates is gaining strength. In particular if we see continued softness in the US data and further slippage abroad, or trade tensions flare up between the US and China, the Fed could cut rates before the end of the 3rd quarter.
The futures market is predicting the Fed will cut rates three times before the end of the year. This seems more accommodative to us than what the real data would suggest.
The probability of a near term recession is rising but is still relatively low at this point.
We have reduced our exposure to foreign equities in favor of high quality US equities. In addition, we have increased the duration of our bonds as the Fed has made a U- turn from raising rates to most likely lowering rates.
One Step Back and Two Steps Forward
Well, we are off to a good start this year. After a dismal performance in the fourth quarter of 2018, financial markets came roaring back in the first half of this year. All of the major asset classes are positive this year; stocks, bonds, commodities, and real estate. The global U-turn in central banks interest rate policy has fueled most of the rally, with expectations for accommodative monetary policy for the balance of the year. However, there is still plenty uncertainty around trade, corporate earnings, and global growth, as the US markets trade near record highs. As we roll into the second half of the year, neither recession nor material overheating conditions are imminent.
For the remainder of the year we see positive global economic growth, but mixed with strength in the US and Emerging Markets while Europe and Japan remain weaker. Asset returns, so far, have outpaced the level of economic activity in most countries. Simply put equity markets may have gotten ahead of themselves. Resilient labor markets and a more dovish central bank policy have calmed recession fears and should extend the life of this expansion, which is the longest in history.
Currently equity valuations are slightly above historic levels, interest rates and inflation are low, and currency volatility seems to be fading. All of the above are supportive for financial markets. However, there are still challenges; global trade is still contracting, many geopolitical risks remain, consumer spending is tapering off and capital spending is below expectations. Rising political uncertainties (Tariffs, Brexit, Iran, etc.) have constrained economic confidence and continue to be the main economic risk at this point. The global trade system relies on integrated cross-border value chains; 80% of trade consists of components, parts, equipment and machines used in the production for other products. Finished goods only accounts for about 20% of trade.
In conclusion, the business expansion is likely to persevere, albeit with a few more nicks and bruises than the previous two quarters. With a mixed outlook the Fed is likely to move towards a looser monetary policy that may involve several rate cuts in the coming months. At the end of the day, the current business expansion (now the longest on record) will probably continue into 2020. The durability of the expansion, the promise of lower interest rates, and the expectation of further earnings growth should help support the markets through the rest of the year. In addition, there are no signs of investor euphoria that generally precedes a bear market. As always, your ISG investment team will keep a close watch on the global financial markets and will reassess the data and our investment strategies as necessary. We sincerely thank you for your continued confidence and trust in us.