May 9, 2019
Our view of the market is qualified optimism. We are committed to challenging our view because markets do not behave exactly as we expect and excessive confidence always leads to trouble.
The domestic economy remains in a solid expansion. There are ample data to confirm that leading economic indicators are rising despite a few troubling indicators such as a flat yield curve. Historically, such outliers are temporary but the curve has been flat for a while, and the rest of the world is weak compared to the US. The Eurozone is close to recession and structural issues plague other countries like Japan. Emerging markets appear stronger and have been helped by higher oil prices. Global bond markets have stabilized and central banks are supportive. Overall, strong earnings underpin the US economy which continues to be the strongest major equity market.
“Patience” is the Fed’s current mantra. Unless a major change in the economy forces the Fed’s hand, they remain strongly committed to their 2% inflation objective and it will take new developments to get them to move. The Fed has called recent price weakness “transient” but heightened productivity has lowered unit labor costs which will help keep inflation under control. At this level the dollar should stabilize given the strong economy and steady policy.
Investor Howard Marks once advised, “Do not act as if the things that should happen are the things that will happen.” It’s always important to guard against confirmation bias, the way our minds focus on and remember data that supports the way we see the world. Based on that belief our view of the market is qualified optimism.
We are optimistic but remain dedicated to qualifying our strategy with data that both confirms and challenges our view. We should not expect markets to behave exactly as we project and excessive confidence always leads to trouble.
The opinions expressed in the blog posts are those of the authors and do not necessarily represent the views of Charter Trust Company. Nothing contained in these communications should be construed as investment advice.