The markets ended the summer on a downswing as participants seemed resigned to the fact that we were heading for a recession. But, as the fall winds have blown, so the markets have shifted back up once again. There are a few reasons the markets have rallied from their corrective lows:
Europe – Countries in the EU have been stalled in neutral for some time. They just do not seem to be able to get any economic traction. Two of their largest economies, Germany and the UK, are in borderline recession with Brexit still yet to be resolved. That said, stock markets in the EU have been rallying recently. It’s almost as if investors are betting the worst is over.
China – We are starting to get snippets from a trade deal with the US. While I would not call it a “done deal”, it seems that both sides are starting to negotiate different points which is encouraging. Remember, China is a big driver to European growth. So, if the US and China can come to a trade agreement, it would be a big boon to the rest of the world.
FED – The FED has continued to lower rates and may even lower again this month. Low interest rates are a catalyst to economic growth. The FED is concerned that the economic malaise that the rest of the world is experiencing could seep into the US. So, they are trying to keep our economy as robust as possible.
Next year will be a tricky one, as we are entering into an election cycle. But our hope is that Europe and the rest of the world will start to grow. The US has been growing in spite of the rest of the world. If the rest of the industrialized world starts to participate, we could see another strong market in 2020.
Global markets have remained volatile over the last few months as slow-burning geopolitical concerns continue to place a ceiling on stocks. Little progress has been made in US/China trade relations, save for a small détente that is not likely to shift the narrative. In Europe, the Brexit malaise endures. Broader Euro-Zone growth has continued to decelerate, while the European Central Bank (ECB) has increased its economic stimulus in an attempt to provide a cushion for Germany and Italy.
Domestically, most data continues to point to a slight slowdown in the US economy over the short-term. Slower growth does not automatically lead to a recession. It simply means we are still growing the economy, just not quite as quickly. Over the intermediate term, we know election years are historically choppy, and we expect this trend to continue for our next election cycle. Over the last few months, we have proactively increased our cash holdings in preparation for this volatility. Again, we are not anticipating a recession at this time, but we do feel it’s prudent to lock in some of our attractive gains from the past year.