Vigilare Wealth Management Q3 2019 Commentary
Fears of an economic slowdown and potential recession have persisted throughout the summer. The global economy has been in a slowdown much of the year and the U.S. is starting to feel the effects. Most recent economic indicators in the manufacturing part of the U.S. economy are contracting and business confidence with respect to trade is waning. These fears have exacerbated stock volatility. For example, this August the stock market selloff induced a record-breaking monthly outflow from equity-funds, topping the earlier record from May of this year.
Much of the weakness comes from the trade wars (too early so call it trade “war”?) and the tariffs imposed on China and vice versa. As a result of these tariffs Mexico has overtaken China as our largest trading partner. Another winner is Vietnam which had close to a 40% increase in imports to the U.S. this year (Go Vietnam!). A trade deal with China or even a cease fire would go a long way in restoring business confidence and global trade. Both the U.S. and China have motivations to make a deal (and not to). We need to account for all scenarios in our risk management decision making. However, a China/US trade deal, would alleviate business uncertainty and be a large positive for global growth.
There is much to be said about the resiliency and robustness of the U.S. economy. A few decades ago, an oil supply disruption like the one recently in Saudi Arabia would have spelled doom for the U.S. economy. While the manufacturing portion of the U.S. economy is contracting, other parts of the economy continue to grow, albeit at a slower pace than a year ago. Manufacturing accounts for about 12% of the U.S. economy while services and consumption account for over two-thirds. The U.S consumer (juggernaut?) is in the best shape dating back to before the financial crisis. Debt payments to income ratios are at multi-decade lows and the U.S. personal savings rate is historically high. The unemployment rate touched 3.5% which is the lowest dating back to 1969 (moon landing). Also, mortgage rates are a percentage point lower from a year earlier. A strong U.S. consumer (like in the 90s) can provide a large buffer against the global slowdown and domestic manufacturing risks.
As we anticipated the Federal Reserve (Fed) did indeed lower interest rates, once in July and again in September. This is a dramatic shift from a year ago when the Fed was on a pre-set course to raise rates into the foreseeable future. We anticipate another cut in October and possibly one more in December or January. This could be an added boost to consumers and to U.S. exporters as it could lead to a weakening dollar.
Outside of a severe slowdown, stocks appear to be a more favorable asset (especially long term) relative to bonds. The dividend yield for the S&P 500 is currently 2% while the yield for 10-year U.S. treasuries is 1.5% and 30-year treasuries is 2%. Short term bonds and cash are viable alternatives in a slowdown period. We wrote in our January commentary that we expected a rebound in the markets this year and so far, this has been the case. However, the economic recovery is now over a decade old, as is the bull market in stocks. For this reason, we will continue monitoring the environment as vigilantly as ever (economic data, eroding consumer and business confidence, earnings calls, market signals, etc.) for more signs of a slowdown and make risk adjustments as appropriate.
Thank you for your trust.
The Vigilare Wealth Management Team
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