CCR Wealth Management
Market Outlook - March 2019
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Our upcoming travel schedule requires that we jot down some quarterly thoughts prior to the quarter’s end. No doubt we will need to re-write a few times as we go, given the rapid pace of news. In January we discussed a few near-term issues that investors were looking for resolution on. These included Chinese trade negotiations, the UK’s divorce proceedings from the European Union, interest rates and slowing global economic growth. We think sufficient formation of these issues has taken place in mid-March to comment without too much speculation needed on what the final days of the month might bring.
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The March 1 deadline for wrapping up an agreement with China on trade issues has, of course, come and gone. The US administration, having been satisfied with negotiation progress, “benevolently” kicked the deadline out to April for concluding talks. But more recently, President Trump signaled that current tariffs in place could be kept in place for a “substantial period of time”, rattling some market watchers concerned that the deal may be in jeopardy. Our view has not changed. Recalling our insistence last year that the imposition of tariffs on Chinese goods was not, in fact, part of a trade war but rather a negotiating tactic, we continue to believe that this administration’s strategy involves periodic introductions of chaos to keep negotiating partners guessing. While we do not pretend to be geo-political strategists, we do get the sense that Trump’s walking away from the table in Hanoi (supposedly at the precipice of a nuclear-weapons deal with North Korea) was in large part performance art targeted to an audience of Chinese trade negotiators. China needs trade resolution more than the US, given their struggling economy. We think a trade deal with China is desired more by the administration than a likely unenforceable nuclear deal with North Korea (which has yet to live up to the terms of any past agreements). We believe a deal with China is inevitable and could provide confidence to investors globally.
Brexit appears to be a thornier issue, and thus far has thwarted the optimism expressed by former UK Prime Minister, David Cameron at the dinner we attended last month. In our February webcast we briefly discussed Mr. Cameron’s view that while having voted down the negotiated terms of Britain’s exit from the EU in January by a wide margin, not a single member of Parliament desired a “hard Brexit”. Fast forward six weeks from that historic defeat and Parliament has yet-again rejected a slightly modified deal. They then voted against a non-negotiated settlement (“hard Brexit”) and voted for an extension (requesting a June 30
th
deadline) to settle upon an agreement—
as if it was up to them
. Europe’s response was terse; agree to the deal by early April—and they will allow implementation to be delayed until late May. Don’t agree, and hard-Brexit begins April 12
th
—just three weeks away, as we write. Given the lack of alternatives put forth by the opposition to contrast the terms negotiated by Therese May’s team, it seems a reach at this point to believe a resolution will be found in the next few weeks that couldn’t be found in the last 33 months, but this story continues to unfold even as we write. The Europeans also have political concerns about being seen a “coddling” a mutinous trading partner, given the pressures within the union by other populist factions unhappy with Brussels’ authority. The hour is late, the outcome remains uncertain as we write, and both the UK and Europe can ill-afford the economic disruption that would accompany a failure to reach resolution.
The March Federal Open Market Committee meeting wrapped up this week with an announcement that the Fed declined to raise rates this time around, will further slow their balance sheet unwinding (and ultimately halting it in September), and the strong suggestion from the Fed’s own “dot plot” estimates that rates would likely not rise at all this year. This is a more dovish stance than our January prediction of one hike this year, and we think slightly more dovish than consensus. Much can--and no doubt will--be read into this decision. First, it is generally good news for bond holders (the Bloomberg Barclays Aggregate Bond index is up 2.61% year-to-date), and supportive of prices in all asset classes. Second, it takes a specific worry off the table for the foreseeable future (leaving us to stew over China and Brexit). However--there’s
always
a “however” when discussing the Fed--this more dovish stance bespeaks the Fed’s own concern about global economic growth, and therefore, US economic growth. The fed’s own projection for US GDP for 2019 was lowered to 2.1% from 2.3%. We will note here that the Fed has generally been terrible at GDP forecasting since the last recession, having overestimated growth in every year—and badly under-estimating growth in 2018. Still, the continued dovish tone on economic growth outlook will likely have many wondering what the Fed might know that the market doesn’t, given its sharp advance higher in recent months.
--with an emphasis on caution…
We would summarize our interpretation of the three preceding paragraphs as potentially
positive
news (China), potentially
negative
news (EU/Brexit), and decidedly
neutral
(interest rates), respectively, as they pertain to our investment outlook for the remainder of this year.
In January we described ourselves as “
cautiously optimistic—with an emphasis on caution
”. It seems very appropriate to emphasize to clients that now, the beginning of the third week of March, US equity index year-to-date returns
are
ahead of most full-year predictions
. The S&P 500 is up 14.43%, the Dow Jones Industrial Average is up 11.96% and the NASDAQ Composite is up over 18%. Further raising our skepticism of current broad-equity index levels is the fact that the Dow Jones Utilities index has been making new highs, bonds are up over 2% thus far this quarter (at the high-end of our expectations for the year), and gold has continued its rally from the 4
th
quarter. These are all defensive plays, signaling to us that many investors seem to have “one foot out the door”. As US markets continue to advance, we see the potential “good news” of a trade-deal with China increasingly priced-in to equities. Envisioning catalysts that could keep Q1 momentum going throughout the year will requires good deal of imagination, in our view. Investors should adjust their full-year expectations accordingly.
“With the boost from fiscal stimulus as already faded, and the lagged impact of higher interest rates still feeding through, we expect economic growth to remain below its 2% potential pace this year”, says Capital Economics (CE) in response to the Fed’s announcement. Indeed, CE projects perhaps as much as 75bps of
rates cuts
—as soon as the first half of next year.
An economy growing, but at a slower pace, is still supportive of a bull market. However, the chop we experienced in the fourth quarter will likely return this year. Investors should note that while we (and many others) have been talking about a “late-cycle” market, late-cycles can last for long periods of time. Consensus estimates for US GDP are currently calling for a cooling to ~2.4% in 2019, down from ~3.1% in 2018.
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Of more immediate concern to us than the slowing rate of growth in the US this year is the possible contraction of economies in other areas of the world—particularly Europe. CCR Wealth Management’s most pro-active expression of our cautious outlook this quarter has been to further reduce our non-US equity exposure to the lowest level it has been in the firm’s history. We are targeting a single-digit percentage of equities in total. Over the years we have repeatedly reminded our investors that we are “global investors”, meaning we will seek investment opportunities around the world. However, we are also “tactical” investors, meaning our asset class weightings will be either offensively or defensively positioned based on the available leading indicators.
The available leading economic indicators out of non-US developed economies is less than encouraging. An understanding of factory orders, as well as raw material and “intermediate goods”—all supply chain economic activity has historically given us a pretty good indication of actual future economic activity. Below we display the Purchasing Managers Index levels for the largest economies in the world, outside the US.
GERMANY
manufacturing PMI
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CHINA
Caixin manufacturing PMI
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For context, a PMI reading above 50 indicates an economy that is growing or poised for growth. PMI’s below 50 indicate economies which are shrinking or poised to shrink. It is true that not all economies rely heavily on manufacturing (the US less so than the countries listed here). Services PMI and Composite PMI’s are aggregated and can be accessed by interested readers at
www.tradingeconomics.com
. We find that significant economic slowing in these countries is corroborated by these other measures. Finally, PMI releases are monthly, and can therefore be somewhat “noisy”. Our focus on the measure here is on what we believe to be the trend, which we think is significant, and skews negative.
We commented in January about our concern regarding central banks around the world and their ability to arrest slowing growth through policy. These concerns were echoed very soon after by Dutch multinational firm DSM CEO, Feike Sijbesma, at the World Economic Forum in Davos:
“We need to recognize that from a monetary perspective there is no ammunition left in Europe, (the) interest rate is at an all time low, and also QE (quantitative easing) program which we are now building down…So if we really get to an economic slowdown in Europe, I think central banks and governments, from a monetary point of view, have no ammunition left to address it”.
Our move to a minimalist capital allocation abroad is a defensive measure. It is not meant to predict a recession or avoid an “inevitable bear market” in other countries. Rather, it is based on our assessment of where opportunity lies on
a
relative basis
from a broad-equity standpoint.
Once again, the US is the “cleanest shirt in a pile of dirty laundry”.
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To view more videos and articles written by the CCR Wealth Management team visit the
CCR Insights Page
on our website, and follow us on social media.
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CCR Wealth Management, LLC provides a wide range of financial advisory services to high-net-worth individuals, corporations, group retirement plans, pensions, and nonprofit organizations. Many of our clients come to us during a variety of life changing events such as: sale of a business, sale of a primary or secondary residence, stock option analysis, retirement, liquidity needs, divorce or loss of a spouse. In any environment, we can customize a unique solution for each situation. We specialize in:
Investment Management * Financial Planning * Group Retirement Plans *
Retirement Planning * Educational Planning * Insurance Strategies * Tax Efficiency * Group Health & Life Insurance
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© 2018 CCR Wealth Management, LLC
The views are those of CCR Wealth Management LLC and should not be construed as specific investment advice.
Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in
market conditions and, when sold or redeemed, you may receive more or less than originally invested. All information is
believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
Investors cannot directly invest in indices. Past performance does not guarantee future results. Securities offered through
Cetera Advisors LLC. Registered Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative,
CCR Wealth Management, LLC. Registered Investment Advisor. Cetera Advisors LLC and CCR Wealth Management,
LLC are not affiliated companies. Cetera Advisors LLC does not offer tax or legal advice.
CCR Wealth Management 1800 W. Park Drive, Ste 150, Westborough, MA 01581. PH 508-475-3880
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