March 2019 – The Case of the Bull and the Bear

By The Lerner Group on March 1, 2019

Economic data, reported in February, indicates that the economy may be slowing. December retail sales experienced the steepest decline in ten years with sales falling in almost every category. U.S. industrial output fell sharply in January, in most part due to a large drop in vehicle production. Industrial production also decreased by a seasonally adjusted 0.6% in January from December. On top of these declines new housing starts fell to a two-year low and existing home sales fell to its slowest pace since late 2015. “U.S. economic growth has sharply decelerated since early December,” said David Kostin, Goldman Sachs chief U.S. equity strategist, in an investor note. [1]

Despite this bearish economic data, the stock market has continued its bullish rebound in 2019. Stock prices have seen the fastest surge in more than 30 years. This disconnect may be attributed to the fact that stock market prices tend to trade based on forward looking indicators and may be moving ahead based on expectations of increased consumer confidence and increased spending.

Contributing to the market’s positive outlook is the Federal Reserve reiterating its new, more patient tone on future interest rate increases and maintaining flexibility with the balance sheet. This significant shift in Fed policy has helped ease market slowdown concerns. In addition, talks of a near-term recession have quieted, with forecasts for a late 2019/2020 recession being pushed out to future years.

The Federal Reserve policy shift has also caused interest rates to decline. The market had worried about the impact rising interest rates would have on refinancing corporate debt, but with the drop in rates, these concerns are subsiding for now. This can benefit companies issuing debt or consumers looking to refinance loans. Higher dividend paying companies can also benefit as their yields are more attractive to investors.

What do we see going forward? Mergers and acquisitions have increased across many industries. This could boost valuations spanning across several market sectors. Investors have continued to withdraw cash from equity funds and ETFs despite the sharp rise in stock prices. Bond funds, on the other hand, have seen large inflows since the beginning of 2019. We continue to monitor this closely and rebalance our portfolios as appropriate.

We believe that stocks will continue to rise albeit not at the pace experienced to-date. Therefore, our focus is on a diversified and balanced portfolio. We will continue to take steps to protect principal and generate income while having the flexibility to capitalize on opportunities as they are presented. As always, we want to ensure that your investments are meeting your objectives and income needs.

We value your opinions. Please contact us if you would like to discuss your portfolio or current market conditions.

[1]  https://www.cnbc.com/2019/02/25/goldman-says-the-us-economy-has-sharply-decelerated-but-these-stocks-can-still-do-well.html