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Investment Insights: Is the grand finale coming?

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

While we don’t know when the economic fireworks will reach their crescendo, the displays have been going off for nine years and will likely continue into 2019. However, many are asking, when does it end?

Multiple fireworks exploding into colorful bursts in a night sky over a California coastal town.As Americans sit down to their beverages, hot dogs, and celebrations this week they should tip their sparklers to the swift action taken by lawmakers and central bank officials in the throes of the spring and summer of 2008. Just as the extraordinary declaration made for independence that actually occurred on July 2, 1776 — ratified two days later by the 13 colonies — became a momentous time for our country, history also tells us that the remarkableness of nine years of an expansion may also be historic. The average recovery is usually about 5.4 years with an average return of 177.0% from the bottom, based on an analysis of S&P data by Crandall Pierce. While the current recovery is one of the longest in U.S. history, it also means it’s a bit out of the norm, and the parade may be signaling an end.

Although we have reported numerous times that the fundamentals remain moderately strong here in the United States, a peaking business cycle earmarked by increasing corporate debt, concerning geopolitical trends, and nervousness through other regional areas all are starting to add up to a pensive investment market. This has been foretold through previous peaks indicated by volatility increases, a flattening yield curve, profit growth softening, and a monetary policy tightening now and on the horizon. What many are volleying back and forth is whether the financial market is just searching for footing before another leg upward or if this may be a last hurrah before a more portentous drop. We contend that it could, realistically, go either way dependent upon ongoing business confidence, consumer optimism, and economic growth.

A region that didn’t act as swiftly and which may bleed economic difficulties to the rest of the world is the European Union. The EU actually went back into recession after coming out from the 2008 financial crisis; and although the market return has been solid, it still has trailed the United States by over 163.44% from the bottom until the end of the last quarter, according to data from S&P and MSCI. Currently there are a few major events which are concerning. One of the most troubling is the growing disparity and continuing populist movement throughout the union with the most recent player, Italy, advocating for a Brexit-type scenario. Another key concern for investors and consumers alike is the escalating, multi-lateral trade war and mounting protectionist rhetoric.

We have seen a growing trend in the investment and economic communities that has shifted focus for a slowdown a little further out. Economists, including our own Chief Economist Scott Anderson, have mentioned that 2019 should be fine but have pointed to the possibility of a recession in the latter part of the year and into 2020. As previously reported, markets don’t wait for actual recessions to be called out, but instead typically peak around six to seven months before a slowdown. For example, in the 2008 financial crisis, the market saw the first drops in October 2007, while the recession was not official until December. In the dot-com bubble of the early 2000s, the recession started in March 2001, while the equity market dropped 23.14% between March 2000 and March 2001.

Currently, we believe that fiscal stimulus should carry economic growth through 2019, and corporate earnings will likely continue to show positive profit advancement as well. Investors are on the fence regarding the current geopolitical events and when looking ahead at the state of global growth. Our team continues to look to take strategic profits in risk assets that may be affected by a cyclical slowdown, while the market is busy sorting out the news.

Chart showing various market returns as of 7/2/18

Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Diversification and asset allocation do not ensure a profit or guarantee against loss.


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