Weekly Market Commentary - Oct 09 2019

The Markets

From trade wars to impeachment inquiries, investors had a lot to ponder during the third quarter. Toward the end of September, they appeared to become more cautious, although it’s difficult to say which issues weighed most heavily. Here are a few questions they may have been asking:

Is recession looming closer?

The chance of the U.S. economy moving into a recession during the next 12 months remained relatively low, according to the New York Federal Reserve. It put the probability of recession by August 2020 at 38 percent. In other words, the likelihood there would not be a recession was 62 percent.

While there are some signs of slower economic growth, there are also positive indicators as well. The U.S. labour market, for instance, remains strong. Brian Wesbury, chief economist at First Trust, points out that while unemployment in the U.S. fell to 3.5% as of last Friday’s employment report, segments of the labour market that generally experience higher unemployment, such as minority workers and unskilled labour, are also experiencing record lows.

The unemployment rates for Hispanic and Black workers has fallen to 3.9% and 5.5%, respectively, and workers over the age of 25 without a high school education have an unemployment rate of only 4.8%.

Will the United States-China trade war end?

The ongoing and escalating trade war with China created an environment of uncertainty for global businesses during the third quarter of 2019. Lack of clarity could slow economic growth. The Economist reported,

“In boardrooms across America, business people are scrambling to assess the impact of the latest escalation in the commercial confrontation between the two superpowers…Most companies make plans over a five- to ten-year horizon and invest in assets with a life of 10-20 years. But with each new tariff announcement, the rules for trading their products become less stable.”

Investors remain concerned about the potential impact of trade on global growth, too. Last week, the World Trade Organization downgraded its forecast for global trade growth in 2019 and 2020, reported the Washington Post.

Unfortunately, the Chinese side has come out and stated that they are unwilling to include any sort of structural change to industrial policy or unfair government subsidies, both of which are core U.S. demands. It is likely that these issues will not be resolved quickly.

Will the impeachment inquiry affect stock markets?

The impeachment inquiry is unlikely to overshadow key economic indicators, but it increases uncertainty and that won’t help companies or investors. Yahoo! Finance cited strategists at JP Morgan Chase who wrote,

“Despite the drama this process will inject into the rest of the president's first term, there is little justification for altering asset allocation now, unless one thinks that this issue is the decisive one that tips the US economy into sub-trend growth and/or a profits recession…To us, impeachment more seems yet another constraint on returns over the next year, given the newer uncertainties created around international and domestic policy.”

You know what they say: Markets hate uncertainty. As a result, markets may remain volatile for some time. Our portfolios are designed to reduce volatility and limit losses in the event of a downturn. If you are worried about your investments or current market conditions, please don’t hesitate to give us a call.

Small things can change the world

A Planet Money staffer asked a couple of Harvard professors what small things they would do to improve the world. These two ideas are counterintuitive, but backed by science.

• Sign forms at the top rather than the bottom. Signing at the top focuses the mind on the importance of honesty, said Business Professor Francesca Gino. In one study with 13,000 participants, people who signed at the top of an insurance form were more truthful about how many miles they drove.

• Have one line at supermarkets. In banks, a single line leads to all cash registers. Health Economics Professor Kate Baicker said it should work that way at supermarkets, too. “There's a whole branch of operations research that goes back, like, a hundred years about how to get throughput most efficiently through a system. If we all wait in one line, the average wait time is the same, but the variance goes away. Nobody wins, nobody loses.”

If you could, what small change would you make in the world?

Weekly Focus – Think About It

“Act as if what you do makes a difference. It does.”

-- William James, Philosopher and psychologist

Best regards,