It wasn’t but 8 months ago at the end of 2018 when investors anticipated an additional two to three 25 basis point rate hikes in 2019 and belief in the record bull run. This was dashed by a sell off in December 2018 that saw the market reset economic growth expectations and the worst December since the great depression began in 1929.
The S&P 500 is having a record run up 18.77% year to date and powering to all time highs near 3000. This rally is being sustained by continued US economic expansion and a dovish federal reserve promising to take necessary action and cut the federal funds rate. The Federal Reserves dovish tone and market expectations of three rate cuts before 2020 have allowed investors to take a risk on approach to the equity markets.
Technology and growth names such as Microsoft and Apple are up 35% and 29% YTD are bellwethers for the overall risk appetite for investors. Large tech and growth has been in favor over the past 10 years and smart money continues to pile into these names as they drive revenues higher at a faster pace than the overall market. The US consumer remains strong; however, 1st and 2nd quarter inventory building may hold the key to the overall movement of the markets in the second half of 2019. It is is our belief the strong inventory numbers are the result of businesses and consumers purchasing more goods than normal in the face of 25% tariffs against Chinese goods that took affect earlier this year. It makes sense because you would want to stock as much of a product as possible if you knew it was going to be 25% more expensive in a few months.
The direction of the market remains beholden to the Federal Reserve and Jerome Powell’s direction. If the Fed cuts rates 1% by the end of the year, it is believed the market will react favorably and close above 3000 on the S&P 500. Traders are pricing this outcome as the most favorable of all possibilities because of weakness in world markets and the slight slowing of the US economy. Stimulus in the face of slowing could lessen the effects of a possible recession in 2020, rather than an event similar to 2008-2009. I believe the Fed is taking the right action based on current economic conditions; however, they didn’t normalize monetary policy over the past 5 years and it remains to be seen what the overall effect of near 0% interest rates will be on the world economic system. Europe QE and Stimulus has created a “lost decade” for many EU countries and it remains to be seen if negative interest rates will spur inflation or growth across the Eurozone. The QE experiment has not provided the expected inflation and growth that some economist thought it would, it has created an environment of perpetual low interest rates and a European bond market that has allowed 14 companies with a junk rating to have negative yields.