It’s often said there are two things that are guaranteed in life: death and taxes. While there have been many who have expanded this list to include other certainties life has to offer, one that often doesn’t make the list is recessions. As much as we hope and plead that economic expansions will last forever, we know the inevitable truth. The economy is cyclical. It goes through periods of expansion and contraction. Recessions happen as a result.
Markets had a great first half of the year. Major stock indexes, including the S&P 500, reached new highs. However, global economic growth is slowing. Investor concerns about a recession have increased and unresolved trade negotiations with China have created even more uncertainty. Slowing economic growth, rising recession risk, and tariff uncertainty doesn’t sound like a recipe for a stock and bond rally, does it? So, what has spurred stocks and bonds higher?
Things can change quickly. If I was writing this post one month ago, it would be a completely different topic with a much different tone.
Following four straight months of positive performance to start the year, the S&P 500 posted a -6.35% return in May. This was the third time in eight months the S&P 500 had a monthly loss of more than 6%. Fears of a full-blown trade war were reemerging as trade negotiations with China soured and it looked like fresh tariffs would be imposed against Mexico. The trade wars would put downward pressure on an already slowing global economy, putting even more pressure on central banks to ease monetary policy.
As we highlighted in our post “Anatomy of the U.S. Economy,” consumer spending accounts for nearly 70% of U.S. gross domestic product (GDP). Current consumer spending, as well as future spending, is highly influenced by consumer expectations for the economy.
The U.S. economy is on the verge of breaking the record for the longest stretch of economic expansion in U.S. history. Since the U.S. economy hit bottom in June 2009 following the Great Recession, it has been on a slow and steady recovery that has it on the brink of surpassing the expansion from March 1991 to March 2001 as the longest in U.S. history.
The American Dream consists of baseball, warm apple pies, and homeownership. As I near the end of my mid-twenties, many of my peers are trying to realize the American Dream of purchasing their perfect starter home. Over the years, my cohorts have casually been looking to find the deal of the century in a move-in-ready starter home at a low price. But even the starter homes that require major renovations and improvements have come with lofty price tags.
For the past 18 months, two hot button issues for investors have been the Fed and trade negotiations between the U.S. and China. These two issues were the catalysts for two market corrections in 2018, the latter of which nearly approached bear market territory. However, for the first five months of this year fears of a Fed misstep were alleviated and reported positive progress towards a trade deal between the U.S. and China spurred markets to new all-time highs.
When the calendar turned from March 31st to April 1st, the U.S. economic expansion turned 117 months old. Should the expansion continue through July, it would become the longest economic expansion in U.S. history. Given that the U.S. economic expansion is starting to show signs of its age, many have been questioning how much longer until the next recession.
It’s been an eventful few months. After posting its worst quarterly return since the fourth quarter of 2008, the S&P 500 rebounded strongly in the first quarter of 2019 to post its best quarterly return since the third quarter of 2009. The S&P 500 has now recovered much of its fourth quarter losses as oversold signals have faded and investor optimism has been buoyed by a favorable shift in monetary policy by the U.S. Federal Reserve.
The Federal Reserve held their March meeting this past week and indicated no more interest rate hikes will be coming in 2019 as a result of concerns over slower growth and the potential for a bump in the unemployment rate. This is a significant shift from three months ago when the Federal Reserve announced two interest rate hikes would be appropriate for 2019.
In closing 2018, the S&P 500 posted its worst December since 1931, during the Great Depression, and its worst quarter since 2008, during the Great Recession. The good news is we didn’t have to wait long for the bounce back. To start 2019, the S&P 500 posted its best January since 1987. As of Friday’s market close, the S&P 500 is 5.0% below its high on September 21, 2018, but is 19.0% above its low on December 26, 2018.
The National Football League (NFL) season reached its conclusion yesterday when the New England Patriots defeated the Los Angeles Rams 13-3 at Mercedes-Benz Stadium in Atlanta, Georgia to win the Super Bowl. While New England Patriots Fans are busy celebrating their sixth Super Bowl win in the past eighteen years and Los Angeles Rams fans are licking their wounds, some investors are looking to the final score to get a sense of how the stock market is likely to perform for the rest of the year.
Over the past few months, market participants have focused on the yield curve and its history of predicting an economic recession. As the chart below shows, the yield curve has inverted prior to every recession dating back to 1962. With predictive power like this, it’s no wonder investors have been vigilantly monitoring its movement in an attempt to gauge when a recession may occur.
What a difference a year makes. This time last year we were highlighting a picture-perfect year for global stocks. In 2017, both the S&P 500 and the MSCI All Country World Index ex USA were positive for all twelve calendar months. This was the first time either index accomplished this feat and it happened with near-record low volatility while enduring geopolitical tensions, political dysfunction, massive natural disasters, and tighter monetary policy. 2017 was defined by synchronized global expansion whereby most global economies were getting stronger, with the United States leading the charge.
From its close on September 20th to its close on December 24th, the S&P 500 Index declined 19.8%, including a greater than 7% one-week (December 14-21) fall that had not been seen since the Global Financial Crisis of 2008-09. The generally accepted technical definition of a bear market is a decline of 20% or more. While the S&P 500 barely avoided the official bear market designation, it sure felt like one.
Over the past 80 days, the US stock market has declined about 11%, and over the last 365 days, it is down about 1%. Foreign stock markets have declined about 9% over the last 80 days and are down about 10% for the last 365 days as well. The US bond market, typically a good hedge to the risk of stocks, hasn’t delivered much protection during the same time periods, being up about 1% in the last 80 days and down about 1% for the last 365 days.
Over the past few weeks the focus of our weekly posts has been on the volatility in the global equity market. We have sought to provide some insight into what’s driving global stocks lower and provide perspective on how frequently drawdowns like the one we are currently mired in occur. We hope these insights and perspectives have been valuable for you and helped to give you peace of mind.
After a long stretch of relatively calm and steady stock market gains, volatility has reared its ugly head over the past four weeks. Last week we detailed how interest rates have contributed to the recent stock market slump. While interest rates may be the driving force behind the quick and dramatic drop in stock prices, there are other factors at play. Trade tensions between the U.S. and its global trade partners are running high. There is uncertainty around the upcoming midterm elections. There is nervousness as companies are beginning to announce third quarter earnings. Housing sales are starting to slow. Geopolitical pressures are mounting in light of the murder of Jamal Khashoggi in Saudi Arabia. All of these issues have played a role in the recent market volatility that has seen the S&P 500 decline in 15 of the 19 trading days in October.