Before the 4th of July holiday, all three major U.S. stock market indices closed at record highs, despite a slate of recent indicators that would suggest that the economy may be cooling down. As the present bear market has now officially been coronated as the longest in history, recent activity begs the question of “why such exuberance if the outlook is turning negative?” There are a few schools of thought to help offer an explanation:
1. Anecdotally, markets have the potential to exude over-confidence towards the end of bull-market rallies – a sort of final shot of enthusiasm before a correction or recession ensues.
2. Markets may be anticipating a reversal of recent Federal Reserve monetary policy which as seen two years of rate hikes; instead opting to ease short-term interest rates resulting in lower costs of borrowing money; a key factor companies analyze as they consider capital projects and potential hiring decisions.
3. Markets are optimistic about a trade deal being finalized with our largest international commerce partner: China.
Because the market attempts to peer through an opaque crystal ball to formulate present buying/selling decisions, it’s important to emphasize that a deluge of information is available that influences the decision-making process at both the individual and institutional levels, offering a forecasting/predictive model of what might come to pass by way of economic health, trade, and monetary policy.
It is a far from perfect or accurate process.
Equally important is an objective view of the present gauges of economic health. One such indicator is the Institute of Supply Management (ISM) Non-Manufacturing ISM® Report on Business®. The report is a survey of several factors such as business activity/production, new orders, employment, inventories, prices, etc., and consolidates the data into a gauge for which readings above 50 indicate growth, while readings below 50 indicate contraction.
We can conclude that last month’s reading is the lowest over the last calendar year, however, it still suggests growth in the overall economy as measured by non-manufacturing indicators. The author of the report, concludes: “The past relationship between the NMI® and the overall economy indicates that the NMI® for June (55.1 percent) corresponds to a 2.3-percent increase in real gross domestic product (GDP) on an annualized basis.”
In conclusion, investors are constantly bombarded with “soda straw” viewpoints on current market and economic conditions. It’s imperative to recognize a trend versus a data point. This is not to minimize the facts that our present bull market is getting long in the tooth, prolonged tariffs can negatively impact GDP, and that the Federal Reserve influences access to credit through monetary policy. I believe it is too early to call an impending recession or correction; in a twist of fate and despite an eye-opening number of S&P 500 companies issuing negative 2nd quarter earnings guidance, June employment figures significantly beat expectations…
We maintain that proper asset-allocation and discipline is our best defense during periods of contraction or recession. The proper allocation is informed by the financial planning process as well as personal sentiments about risk as measured by market volatility. If you have any questions about the allocation of your portfolio, we look forward to meeting with you to discuss your long-term goals and discuss an appropriate allocation. Your goals, not market predictions, are the most important criteria in determining your investment approach!
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