3rd Quarter 2019 Market Commentary
Surpassing Market Barriers and Volatility Spikes in the Road
The market has conquered some barriers this year in spite of negative news that seems to never end in the media. There's a constant stream of news lately concerning the trade deal with China, a Presidential impeachment motion in the U.S., and a series of drone attacks in Saudi Arabia. Even though these topics may occupy some headlines the fact remains that S&P 500 Index broke through a major psychological ceiling of 3,000.
About twelve months ago we wrote about our anticipation the S&P 500 would have a nice double-digit return and surpass the 3,000 level. Now that this level has been breached, I think there might be some volatility as a result of the negative events happening around the globe. While we see some minor worries concerning housing and auto sectors we remain bullish and don't foresee anything significant enough to derail the U.S. economy. The service sector seems fine and it constitutes two-thirds of our economy. Therefore, we don't see a recession in the next twelve months. Typically, secular bull markets don't end because they are 10-15% over fair value. They end because they reach an extreme. We don't see signs of extremes in the financial data we review. Our financial models continue to point to a longer-term secular bull continuing its path upwards. We anticipate some downside volatility over the next few weeks followed by an upswing to finish the year.
A variety of events will trigger the short-term volatility swings. The trade talks could lead the markets either way, but we anticipate that the trade talks could be a positive surprise in the fourth quarter of this year.
The data coming out of China indicates economic weakness and their second quarter growth rate was only around 6.2%, which was a 27-year low. Chinese industrial production is at a 17-year low short of the expected 5.2% year-over-year. These disturbing rates can set the stage for a prime time for both leaders to work out a deal.
Something else that can add more volatility is the looming Brexit deadline. Britain is set to exit the EU by the end of October unless they seek an extension. The British political leaders are quarreling over when to hold a snap election and debating exit deal details increasing the chance of a difficult and damaging exit. The other turbulent situation in Europe is Mario Draghi planning to end his 8-year term as president of the European Central Bank (ECB) in October with a final burst of monetary stimulus. It appears he may face some heavy resistance coming from other participants at the ECB meeting.
The drone strikes are still making headlines, but I am not as concerned as the reporters are about the consequences for our economy. In 2018 the U.S. was the biggest oil producer in the world. We represented over 16% of the world's production which gives the U.S. a new-found energy independence (EIA). This protection from the Middle East turmoil is a geopolitical strength which could inevitably help with the trade negotiations too.
There are a lot of world events with potential to stir up volatility with equities and could prompt investors to have an emotional response. Emotional responses to short-term situations could be detrimental to long-term goals. However, there are more fundamentals that indicate the markets will continue their upward path in spite of short-term unstableness. While the media is focusing on so much negative, I think there's a lot of positive happening, not to mention the technical market picture. We've had new highs, advanced decline line had a new high on September 17 and then again on September 23, so the technical picture continues to point upwards. Over the last quarter century of working in the investment business, I have often observed the events of the day making a big headline but not result in any real economic impact in the long run. In particular, the Trump impeachment proceedings, Brexit, European monetary easing, and trade deal uncertainty are likely to have minimal long-term impact. These can put a dark cloud over the markets in the near term and cause the markets to trade in a narrow range. However, I believe that these dark clouds will pass and reveal a bright financial environment over the long term.
Investor confidence can take a beating when focused on political strife here and abroad, but the big picture is showing that this current bull cycle may have at least a few months if not years to go. There is an old saying "buy on the sound of cannons and sell to the sound of trumpets". Volatility can often present opportunity. I am still bullish which is based on conservative fundamental inputs and forecasts from our financial models. I stand by my thoughts at the beginning of the year that we're going to finish the year positive.
1. Bureau of Economic Analysis-BEA
Shashi Mehrotra, Chartered Financial Analyst, Senior Vice President and Chief Investment Strategist. The opinions and predictions expressed herein are those of Shashi Mehrotra solely and not necessarily the opinions or expectations of Lincoln Investment or any of its affiliates. Such opinions and predictions are as of September 26, 2019, and are subject to change at any time based on market and other conditions. This material includes forward-looking statements that are subject to certain risks and uncertainties. Actual results, performance or achievements may differ materially from those expressed or implied. No predictions or forecasts can be guaranteed.
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