Our economy is bifurcated to say the least! Our consumer-driven service sector has benefitted from both wage gains and low interest rates. In fact, the most recent ISM Non-Manufacturing (Service) Index remained in expansion territory with 13 of 18 industries in the index showing growth. The L&G investment team sees a healthy U.S. consumer as vitally important to the economy & market.
To say the market has climbed a ‘wall-of-worry’ the first half of 2019 would be an understatement! Trade wars, recessionary risks, Middle East tensions to name a few. All said, stock returns were stellar and bonds rallied (rates down) significantly. The U.S. fixed income market, with its low and positive yields, remains a safe haven & the bond market-of-choice for global investors.
What a difference three months can make! After the stock market’s weakest December since the Great Depression (a market decline of 19.4% from the highs), the first quarter of 2019 experienced the strongest bounce in over 10 years with the S&P 500 Index advancing +13.1%! The Fed’s “dovish pivot” near the end of 2018 was the primary catalyst for the market’s bull run.
While the markets ended 2018 with a thud (the worst December stock market performance since the Great Depression), we believe the current environment for stocks is favorable as interest rates remain low and, one-by-one, our major market headwinds approach resolution. It is our belief that the strong returns of 2017 ‘pulled forward’ last year’s expected returns.
The Fall can be a tumultuous time for the markets. Volatility can increase as hedge funds and mutual fund managers reposition their portfolios by selling losers and chasing winners. This year we expect amplified volatility after last year’s very strong returns, this year’s solid returns and a midterm election on the horizon.
K.I.S.S. is an acronym that stands for “Keep It Simple, Stupid”. Per Wikipedia, the KISS Principle states that simplicity should be a key goal and unnecessary complexity should be avoided. In its most simplistic sense, KISS could be applied to investing basics in coming months. Investors trying to ‘time the market’ and reposition their portfolios before midterm elections may be better off just holding tight.
As an active money manager, we look for opportunities when others are fearful. LaFleur & Godfrey views the volatility exhibited by the market the last few months, after years of virtually no volatility, as a blessing and not a curse. Because the markets are trading more ‘normal’ based on fundamentals (profits) and with less correlation, we are beginning to see many more opportunities to invest in great growth companies at very reasonable valuations.
A New Year typically brings with it a new sense of optimism. This really should be expected in 2018 coming off a very strong market last year and with the recent Tax Bill signed by the President. This keeps us constructive on the markets in the upcoming year but our exuberance has been replaced by cautious optimism for several reasons.
While it is human nature to be more comfortable being ‘consensus’, there is a growing belief on Wall Street and Main Street that we are living in a ‘glass half-full’ economy as opposed to the general view that we are ‘half-empty’. As a result, we believe that the strong market performance over the past year is a reliable barometer that, if Congress does its job and passes corporate tax reform, we may just be in the early innings of an accelerating economy.
Summertime often gives investors time to pause, relax and reflect on a year that is already half gone. Money managers are no different. We could pat ourselves on the back for a first half 2017 that has exceeded most of our expectations. However, that is not our nature.