We, like most investors, have been pleased to see the vigorous rebound in stock prices since the December lows of last year. This rapid dramatic "bounce-back" has swung the pendulum of investor sentiment from overly pessimistic to overly optimistic, according to the Ned Davis Research Crowd Sentiment Poll. Unfortunately, given the checkered contrarian history of extreme investor sentiment, the "herd" is frequently wrong. This, among other catalysts, is why our concerns remain elevated, despite the stock market's early strength in 2019.
4th Quarter Stock Market Highlights
Although the stock market pullback in the 4thquarter was oversold, we were not surprised at some of the declines last year.
- Economic growth around the world is slowing
- While progress on Trade is encouraging, significant uncertainty remains
- These uncertainties appear to be dampening CEO sentiment nationally
- Although we see a "deal" being reached with China this year, we feel it will be further out the calendar than suggested
- Similar challenging trade discussions are scheduled with Europe and Japan
- Our partisan-minded U. S. Government remains dysfunctional
- A combination of higher U.S. interest rates and tighter lending conditions are contributing to a potential plateau in corporate earnings
- International tensions appear to be rising around the world, especially in Europe
- After two years of failed negotiations, the likelihood of a hard-Brexit is rising
No Recession in 2019
Meanwhile, positive news, along with affirmations by our U. S. Federal Reserve on the outlook for interest rates, have helped stock values rebound. Solid Manufacturing and Non-Manufacturing reports are showing the economy is still growing. Unemployment is at the lowest level in over a half-century with 304,000 non-farm jobs added in January, while wages are growing. As a result, we do not see a recession this year as likely, but 2020 may be more probable.
As mentioned in our last Pacific Wealth Management Comment, we anticipate the financial market volatility experienced over the last 5 months to continue. Whether we are approaching the finish-line of this 10 year bull market, or simply in the later stages of the economic cycle, the concerns mentioned above will remain and financial markets appear vulnerable to disappointing news on multiple fronts. It is important to remember this volatility is closer to the historical norm, despite feeling more extreme in the moment.
Our investments are participating in this year's stronger markets but remain conservatively invested within our wealth-preservation-focused discipline. We anticipate investment opportunities presenting themselves as the markets react to the upcoming geopolitics of Trade, Europe and Brexit.
This year's annual Client Dinner will be at the beautiful Birch Aquarium on April 25th.
James C. Kuntz, CIMA®