Here is an update on our views on the US economy, stock market and changes we have made to client portfolios in the past month.
The S&P 500 reached new all-time highs on May 3, 2019. We believe the rally in the first part of 2019 was driven primarily by:
- US Federal Reserve Bank changing from the policy of raising interest rates during 2018 and selling government bonds on their balance sheet, to a policy of keeping interest rates unchanged through the remainder of 2019.
- Hope of a trade deal between the US and China
Let’s look at each of these items.
Figure 1. S&P 500 Total Return
Source: HiddenLevers.com
Interest Rate Policy Announced
In 2018, Jerome Powell, Chairman of the US Federal Reserve Bank stated that the Federal Reserve planned to raise interest rates 0.25% each quarter in 2018, and for the first two quarters in 2019. The plan was also to sell about $50 billion of the treasuries and mortgage backed security (MBS) bonds owned by the Federal Reserve each month, in order to reduce the size of their balance sheet. During a news conference on December 19, 2018, Jerome Powell reiterated this was still the plan for the Federal Reserve. The stock market reacted negatively to this announcement and the selloff of the stock market that began in the previous 2 months, continued for the next several weeks.
The “Powell Pivot”
At the news conference on January 4, 2019, Jerome Powell announced that the Federal Reserve was significantly changing their plan. Going forward they would take a “patient” approach to monetary policy and he stated that “there is no secret path” for raising rates and adjusting the balance sheet. The stock market reacted positively to this announcement and the market moved up strongly for the next several months.
At a news conference on March 20, 2019, Jerome Powell announced another change that the Federal Reserve could keep interest rates unchanged for “some time”, signaling that interest rates could remain unchanged for the remainder of 2019. They also announced they would slow the selling of the US Federal Reserve's bond holdings starting in May and end the monthly sale of bonds in September. This completed what is now being called the “Powel Pivot” away from a policy of tightening rates, to a more cautious and neutral stance and holding rates steady in the meantime. The stock market reacted positively again to the news and the US stock market moved upward a little more from the last part of March and into part of April.
Chinese Labor Practices and Trade with US
Another factor we believe that was influencing the US stock market was the anticipation of the US signing a trade deal with China. It is widely agreed upon by business leaders, as well as Republicans and Democrats in Washington, that China has been using unfair labor practices with the US for decades and neither party in the past has been willing to confront the Chinese to address this issue.
China requires that US companies that do business in China must operate through a Chinese company that is at least 51% owned by the Chinese. According to Chinese law, Chinese companies must give all technical data and customer data to the Chinese government when requested. The concern is this apparently has resulted in the stealing of intellectual property from American companies operating in China. At the same time Chinese companies have been able to invest directly in the US and purchase US companies while US companies cannot do the same in China.
US and China Trade Deal
The Trump administration announced in 2018 that it would put 10% tariffs on nearly half of the goods coming in from China and if a trade deal was not completed, the tariffs would increase to 25%. The US and Chinese delegates worked through 2018 and early 2019, to complete a trade deal. Larry Kudlow, White House Economic Adviser and Robert Lighthizer, US Trade Representative, indicated in interviews in late April and early May that negotiations were moving along and that a trade deal was nearly completed. It was widely speculated that the Chinese trade representatives would sign the trade deal during their trip to the US in the first week of May.
We learned on May 3rd that Chinese senior officials would not agree to the terms that had been negotiated by the Chinese trade representatives. The trade deal that was negotiated called for the Chinese to change their laws to stop the required transfer of intellectual property from Chinese companies to the Chinese government. The senior Chinese leaders would not agree to a trade deal with the US that forced them to change their laws. The trade deal had been expected in May but fell through without any additional talks scheduled for the next few months. The stock market dropped as it reacted negatively to the news. With no trade deal, the 10% tariffs on Chinese goods increased to 25% that weekend and China retaliated on Monday May 6, by raising their 10% tariffs to 25%.
Active Money Management
Financial Journey Partners has been watching these developments and the reaction from the stock market daily. The S&P 500 reached an all-time high May 3rd as investors were anticipating a trade deal with China. When the trade deal fell through, we believe the risk in the stock market increased significantly. In our opinion, the risks to the downside were outweighing the rewards to the upside. We chose to sell several positions from client portfolios, very near their highs, to take profits and reduced risk and stock market exposure. As active money managers, we will reduce positions during times of increased risk to protect principal.
We think that weakness in the stock market can lead to buying opportunities, so we are watching for this daily. If you have questions about the comments of this article or about your portfolio give us a call.
Elaine Manley
Scott Manley
Linda Tjiputra
Index returns shown are not reflective of actual performance nor reflect fees and expenses applicable to investing. One cannot invest directly in an index.
Past performance is no guarantee of future results, and all investing involves risk. Index returns shown are not reflective of actual performance nor reflect fees and expenses applicable to investing. One cannot invest directly in an index.
Investment advisor services offered through Mutual Advisors, LLC DBA Financial Journey Partherns, a SEC registered investment adviser. Securites offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc., and Mutual Advisors, LLC are affiliated companies.