Confusion or Conviction?
Stocks have climbed higher but we don’t recommend attempting to trade around short-term moves; rather, investors should remain disciplined and diversified, and use any volatility to rebalance as needed. The consumer continues to drive the economy, while weakness is mostly still concentrated in manufacturing. Yet, the potential for volatility remains, as a comprehensive trade deal is not in sight, tariffs on consumer goods are still set to kick in on December 15, and monetary policy’s ability to spur growth and inflation may be waning. We continue to favor large caps over small caps and are neutral to U.S. and global equities.
Mixed Picture Getting More Concerning
Stock markets have become more volatile as trade tensions have worsened and weakness in the manufacturing side of the economy has caused increasing concern. Swift resolutions to these issues seem unlikely and a dovish Fed may not be the elixir to what ails the economy. With the likelihood of persistent volatility in the coming months, we recommend investors stay broadly diversified and focused on the long term. From a tactical perspective, we remain neutral to U.S. and global equities; with a bias within the U.S. market toward large cap stocks relative to small caps. Investors should not attempt to trade around short-term moves in the equity markets; but instead remain disciplined, diversified, and use rebalancing as necessary.
Schwab Market Perspective: Canary in the Coal Mine…or Simply Clouds on the Horizon?
The manufacturing side of the economy is showing increasing signs of weakness, but the consumer still looks healthy—which side wins and what should investors do?
Running in Place
The last 18 months have been anything but boring, but if you had ignored the market over that time and only recently started paying attention, you may think that little has happened. The running in place analogy is probably better replaced by hiking a mountain.
Dangers Rising…or Potential Opportunity Emerging?
We won’t speculate about the final outcome of ongoing trade tensions, but we are growing more concerned that the hit to business confidence will increasingly filter through to consumer confidence and hard economic data. A more positive outcome could elongate the runway between now and the next recession. In the meantime, we continue to recommend that investors maintain a relatively neutral stance consistent with long-term asset allocations, using inevitable gyrations to rebalance as needed.
Trade Tension Takes Turn at Top
Trade tensions will likely continue to contribute to increase volatility and the longer it drags on, the bigger hit to economic growth, consumer/business confidence and the stock market. Our neutral stance around U.S. equities suggests keeping allocations no higher than longer-term strategic targets, with a large cap bias; using volatility for rebalancing opportunities. For those investors who don’t have broad international exposure, now may be a good time to consider areas that may feel less impact from the U.S.-China trade dispute.
Sell in May?
Some volatility has returned and we believe a pullback in U.S. equities is a healthy development in terms of both investor sentiment and valuations. But some cracks in economic growth may be emerging, and inflation could start to rise given the tight labor market, so investors should remain disciplined with an eye toward rebalancing in the face of volatility. Trade remains a weight on the confidence of business leaders, and if the dispute with China continues to escalate, stocks and the economy would likely suffer further.
Saved by Zero: Earnings May Eke Out a Positive Quarter
As we move toward the finale of first quarter earnings season, results have been a bit better than expected, but barely in positive territory. The earnings beat rate has been above historical norms; while revenues have been a touch more disappointing relative to expectations. Multiples have expanded this year thanks to a strong stock market; but earnings will have to do more of the heavy lifting at some point.
Concerning Lack of Concern?
U.S. equity market gains since the Christmas Eve 2018 low have been impressive, and we don’t think a recession is in the near-term future—but sentiment is extended and investors should be cautious about chasing gains at this point; either in the United States or emerging markets. A near-term pullback would likely be healthy and could afford a better opportunity for investors who are looking to add equity exposure. On the other hand, those investors whose portfolios are now holding an outsized equity allocation could use the latest strength to rebalance back toward targets.
Stocks vs. Bonds…Who’s Right?
Stocks and bonds appear to be at loggerheads with regard to the economic outlook, and we believe both sides have merit. Unless earnings comfortably surprise on the upside, with healthy corporate guidance, there is a risk that stocks will give back some of their recent gains. Investor optimism remains elevated, economic data has been mixed, earnings expectations are in the red for the first quarter, and persistent trade concerns all remain potential headwinds. Stay patient and diversified and stay focused on longer-term goals.
Brief dips in U.S. stocks have done little to dent investor confidence; and with an inverted yield curve, trade uncertainty continuing, economic growth slowing and earnings possibly declining in the first quarter, we believe a pullback is becoming increasingly likely. Investors should remain disciplined and diversified and continue to prepare for the inevitable end of this cycle—without needing to pinpoint the timing precisely.
The Beginning is the End is the Beginning: A Look at Recessions
Recession chatter is abundant lately. It’s increasingly the focus of Q&A sessions at investor events at which I’ve been speaking. I also received a series of questions last week about recessions from a Schwab colleague who has many younger Schwabbies on his team, most of whom have not lived as working adults through a recession.
Be Careful What You Wish For
Markets got a healthy reprieve from last year’s fourth quarter carnage as a few headwinds became tailwinds; including a more dovish Fed, some hopes on trade, strong fourth quarter earnings growth, and an end to the government shutdown.
Mixed Market Messages
It’s difficult to get good footing in a market that has so many mixed messages bombarding it. We recommend patience, discipline and diversification as expect continued bouts of volatility. The U.S. government shutdown is over, for now…and the Fed is in pause mode, for now…but confidence in government is low and monetary policy is likely to persist. In the near term we believe the most important needle-mover will be the result of trade negotiations between the United States and China. The problem is the inability to gauge the likely outcome.
Every Rose Has its Thorn: Healthy Rally, but Risks Linger
At a recent client event I was asked about our ongoing view that volatility would remain elevated—specifically, whether the rally off the December 2018 low in U.S. stocks was an indication that our view might be wrong.
Keeping Calm in the Chaos
It can be difficult to remain calm in the midst of stock market action like we’ve seen over the past couple of months—but discipline is necessary during more tumultuous times. Although we do see rising risk of a recession, we don’t see a repeat of 2008 in the cards. Absent a recession—even if we enter a “formal” bear market (at its recent closing low, the S&P was down 19.8%)—additional weakness may be somewhat limited. Recession-related bears tend to be longer and grizzlier than non-recession bears. Until we get more clarity on the health of the economy, we continue to suggest investors remain defensive.
Gathering Storm or Passing Clouds?
The end of 2018 will likely morph into more of the same in 2019—higher volatility within a relatively wide equity range, including ongoing corrective phases or even a continuation of what has been a “stealth” bear market this year (rolling bear markets across and within asset classes).
The Best Way to Travel: Musings from Asia
I spent last week in Asia—two days in Hong Kong, one day in Shanghai, and two days in Singapore—visiting our clients. It was a fascinating trip in some of my favorite cities in the world … well, in the case of Singapore, a city, island, and country all in one.
The Seasons of Investing
October has again been a scary month for investors, even though past performance does not indicate future results, history shows that stocks tend to face a seasonal tailwind heading into the end of the year. There will likely be more volatility but at least overly optimistic investor sentiment has eased, U.S. economic growth remains solid, and the midterm elections will soon be over, all of which could trigger at least a relief rally off the recent lows. But gains both here and globally are likely limited by myriad late-cycle pressures. Remain disciplined, consider diversification and rebalancing, and consider establishing a more tactically defensive positioning.
Always Be Prepared
Stock market action recently illustrates again why it’s important for investors to remain disciplined and diversified in a way consistent with their risk tolerances and investment goals. The bull market may have more legs, and upside surprises are possible, but risks have been rising over the past year or so, leading us to be more cautious and recommend that investors limit the risk in their portfolios.