September Economic and Markets

Contents - Market Update, Economic Growth & Things We're Watching Out For

I wanted to share some updated thoughts on the markets and economy.  As I started writing this Hurricane Irma was bearing down on Florida (as the most powerful Atlantic storm ever recorded), and after Hurricane Harvey devastated the Houston area people are understandably skittish about major weather related events.  Even though it has been a banner year in the markets, I feel like many people are still very skittish about the markets and economy, seemingly just waiting for the next big financial hurricane.  Let's take a closer look at some of that.

What are the sources of unease currently when it comes to the markets?  Geopolitical tensions (especially North Korea), stretched stock market valuations, Washington gridlock, rising short-term interest rates, and varying feelings about overall economic growth here and around the world would be the main things.  As we think about it, many of these concerns have been with us the last 8 years of market growth as new highs have been repeatedly set.  There are always reasons to be cautious – it's a prudent investment strategy.  Your investments are made with your hard-earned income and have important long-term purposes.

That being said, it's important to remember that the markets have a strong historical tendency to move higher, not lower.  Trailing 12-month returns since 1871 show the US stock market has generated positive returns nearly 75% of the time.  Perhaps even more interesting is the market has generated 20+% returns almost 1/3 of the time.  These returns have come despite periods of geopolitical unrest, rising & falling interest rates, high valuations, and other volatility.  In other words, for the long-term investor (which even includes many retirees) with long-term goals, it still typically makes sense to have some stock exposure that doesn't change based on just those fear factors, unless your personal situation, needs, and goals have changed.  If so, please let me know.

Based on where we are, though, there are 2 items to make sure we consider.  First, since the market is experiencing high valuations (by various measures), it is less likely that we will average the strong market returns that we've seen in recent years.  Second, we should expect more volatility in the days & months ahead.  Volatility indexes recently hit the lowest levels since the 1960's.  We have had very few big down days, but expect that to change at some point.  September 5 saw the Dow drop 234 points and it concerned some people before settling down again the rest of the week.  An interesting point to keep in mind as you see those numbers is that, as recently as 2011, a 234 point drop would have been a 2% decline, where now that is just over a 1% drop.

I want to make sure that your portfolio is still set in a way that makes sense for your situation that allows us to feel confident we can weather any storms that come and get you safely to your destination.  I have been doing a lot of work on our portfolios in the office.  I also just updated our risk questionnaire that we use for helping us match portfolio risk/return characteristics with each of our clients.  Josh & I will be reaching out to get updates from some of you.  If you would like to discuss your situation proactively, please reach out to us.

 3% Economic GrowthDo you believe it?

Some other quick economic thoughts - 2nd quarter GDP (Gross Domestic Product, which is the largest measure of economic activity), was just revised upward (U.S. BEA), from the initial annualized reading of 2.6% to 3.0%. That compares with 1.2% in Q1.  As a side note, since 1992, there have been 6 major (also the costliest) hurricanes that have made landfall in the US.  Real (annualized) GDP slowed during the hurricane quarter in 4 of the 6 times, but generally rebounded in the following quarter (actually being modestly stronger than average in the 2 quarters after the hurricanes)(Howard Capital Management).  Something to keep an eye on.

Anyway, the upward revision for Q2 leads directly into the highlights of an August 30 CNBC interview with Warren Buffett that I happened to come across (https://www.cnbc.com/2017/08/30/warren-buffett-this-doesnt-feel-like-a-3-percent-gdp-economy.html).

The legendary investor was asked, “Does this feel like a 3% GDP economy to you?” Buffett didn’t miss a beat. “No, it’s been about 2% per year now since the fall of 2009.”

While he also pointed out that long-term growth of 2% “is not bad,” he maintained that it just doesn’t feel like a 3% economy to him. In a way, he’s right. One quarter isn’t enough to sway sentiment.

If we look at the data provided by the U.S. BEA, the economy has exceeded a 3% annualized rate just once during the last 2½ years. It’s also fallen below 1% twice. Coincidently, the average increase in GDP over the last 10 quarters is exactly 2%.

No doubt about it, at the margin, the improvement is welcome. And recent reports suggest the economy is on a firmer footing, even if GDP growth hasn’t been very robust.

The jobless rate stands at 4.4% (U.S. BLS), which many economists would argue is near or at full employment. And job creation has been respectable, if unspectacular (using payroll data from the U.S. BLS).

Job openings stand at over 6 million, a record high that dates back to 2001 when this particular survey began (U.S. BLS). Plus, weekly first-time claims for unemployment insurance remain at an unusually low level (Dept. of Labor), which indicates employers are reluctant to lose workers amid improving business conditions and the difficulty in finding new ones.

Generally upbeat conditions in the labor market may not spread evenly to every industry, and wages have yet to significantly turn higher, but favorable numbers are underpinning consumer confidence, in my view.

Just take a quick peek at the Conference Board’s monthly survey of consumer confidence, which has registered its second highest reading of the expansion and the second highest reading since late 2000.

The upbeat sentiment suggests the divisive mood in the country that has been played up in the media isn’t dampening sentiment. That, is certainly encouraging.

Potholes I’m watching out for:

 September has historically been the worst-performing month for stocks (https://www.yardeni.com/pub/stmktreturns.pdf  Yardeni Research—average percent change each month).  It’s unclear why that happens, and it doesn’t necessarily mean we’ll be treated to an early Halloween, but here are 3 things I’m monitoring.

  1. North Korea.  It has yet to significantly impact shares, but what’s happening in Asia is unsettling and could create temporary dips in the market.
  2. A government shutdown. We may see one October 1. Historically, government shutdowns may create a few bumps as short-term traders react to headlines, but longer term, the 18 shutdowns since 1976 have had virtually no impact on shares (NBC News, St. Louis Federal Reserve).
  3. Breaching the debt ceiling. The Treasury will run out of authority to borrow, likely in early October. In the unlikely event Congress fails to raise the debt ceiling, we would sail into uncharted financial waters. If we tiptoe up to the deadline, expect uncertainty to rise.

While forecasting market surprises can be dicey, remember that longer term, shares react to the economic fundamentals, which are aligned with the financial plan we’ve recommended for you.

Econ&Mkt image 9-17.jpg

I hope that was helpful.  Please let us know if there is anything else to discuss or review with you.  

Jeff

(Special thanks to Horsesmouth, CLS Investments, and Howard Capital Management for some of the ideas and data for my commentary this month.)