Investment results for the first quarter of 2019 were nearly the mirror opposite of the last quarter of 2018. After sharp, broad declines to end 2018, most investment categories bounced back in the New Year. Thinking back to Christmas Eve, the long-running bull market for Large Cap US Stocks was on its death bed. Down 19% over three months and 8% in the previous 4 trading days, it seemed certain that the first bear market in nearly a decade was about to arrive. But the Christmas Eve slump turned out to be an inflection point and the stock market rose seemingly uninterrupted for the first three months of 2019.
On March 9th, we reached the 10-year anniversary of the end of the last bear market. In its now 10-year life, the current bull market has battled a steady stream of doubters and skeptics. Credit for the rising investment markets is often given to the Federal Reserve Bank’s Quantitative Easing policies and more recently to corporate tax cuts and looser regulatory burdens. While those have been favorable tailwinds, the real driver of stock prices is company earnings, which have increased steadily since the 2008-2009 bank earnings collapse.
Similar to investment market trends, US economic growth has been positive for the last 10 years. As the US economy becomes more consumer driven, economic cycles are not as pronounced. Manufacturing’s impact on the overall economy has lessened and the swings from strong growth to economic recession have been less frequent. In a slow to moderate growth economy, companies have achieved positive earnings growth.
Other than potential geopolitical events, what economic factors could cause US economic growth to falter? The Federal Reserve could push interest rates too high in an effort to fight inflation. This almost happened in 2018. The Fed raised short-term interest rates consistently in 2017 and 2018. Economic growth stagnated in the second half of 2018, resulting in lower long-term interest rates. The leaders of the Federal Reserve Bank recognized the risk and are now signaling their intent to hold rates steady for the rest of 2019.
Another possible cause of an economic slowdown and a bear market is a flare-up in credit troubles. While auto, education and credit card debt are all high by historical standards, relative to the size of the US economy, they are nowhere near the mortgage debt levels of 10-12 years ago. Government debt and corporate debt are also at all-time high levels, but so far investment markets seem to believe those levels are supportable in the current economy. High debt levels will make it more painful if the Fed raises interest rates.
While inflation or a new debt crisis could be the catalyst for the end of the long bull market, a trade deal with China or a workable plan for Brexit could spur the markets higher. Maintaining a diversified portfolio should allow you to participate in the rising investment markets and provide some downside protection if or when economic growth no longer supports current values for investment assets.
This article was authored by Christopher Borden, a financial advisor located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or [email protected]
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Talk to your financial advisor before making any investing decisions.
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