My father used to say, “In confusion there is profit.” He probably meant you could get away with an awful lot of nonsense while the adults were looking the other way. But I think there is some wisdom here – Let’s consider this: We are confused. Global growth is slowing, the earnings growth of companies here in the US is slowing by more than half this year, even the Federal Reserve is slowing its forecast of interest rate increases. And yet, the stock market has been rising back to all time highs. That’s confusing.
Another word for confusion might be “uncertainty.” In both stock world and bond or interest world we see uncertainty almost every day. When companies are uncertain about trade barriers, tariff implications and supply chain disruptions they will not launch a big project or initiative. Thus, global economic activity slows, adding to the uncertainty. The Federal Reserve has said recently and repeatedly it will be “patient,” acknowledging in an unstated way signs of a slight slowing of the economy.
In uncertain times money flows into US Treasuries, usually five to ten year Treasuries. We are seeing significant inflows to longer dated, ten year bonds, and as buyers come in, the interest rate on those bonds drops. Today, the three month Treasury interest rate is above the ten year Treasury interest rate. Not good. This is a warning signal to investors – the inverted yield curve very often signals a looming recession. So, today the market is down. And we remain a bit confused. Is this really a signal, or is it a bit of noise within an economy that is still pretty good?
OK, we see some confusion, so where is the profit? In a pretty good economy with interest rates solidly lower for longer it is likely we will have a few more quarters of equity growth, but slow growth. My sense of it is this: we may be seeing the highs for this year. Maybe we hold on to this level after several pullbacks; maybe we stair step down from here to a positive but lower growth for the year. Looking into the next quarter we see opportunity in the boring corners of the investment world – Bonds and dividend paying stocks. Small yields can add a meaningful addition to a slowing growth portfolio.
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.