by Connor Darrell
CFA, Assistant Vice President – Head of Investments Both
equities and bonds managed to creep higher last week, with equities fueled by
positive developments in global politics (Brexit and U.S./China trade
negotiations) and bonds buoyed by a drop in short-term yields that was likely
driven by weaker than expected retail sales data. The 0.3% decline in U.S.
retail sales was the first monthly decline since February and was primarily a
product of a decrease in so-called “noncore” spending, which includes auto
sales, purchases at gas stations, and building materials stores. Moving
forward, many will be watching this and other consumer data very closely in an
effort to get a feel for whether the weakness in manufacturing has permeated to
other areas of the economy. For now, this looks more like a blip rather than a
sustained downward trend, and the U.S. consumer should continue to benefit from
the healthiest labor market in decades.
Politics and the Market As the political climate has continued to become more and more polarized in recent years, many Americans have had a hard time separating politics from investing. We believe the below chart from JPMorgan does an excellent job of helping to convey the importance of investing discipline during periods of difficult political transition.
The chart shows consumer confidence
broken down by political affiliation and tells an interesting story. Beginning
in 2008 at the onset of the Great Recession, it is clear and unsurprising that
neither Republicans nor Democrats felt optimistic about the economy. But as the
market and economy recovered during the Obama administration, optimism among
Democrats increased at a significantly higher rate. Then, almost overnight in
the beginning of 2017, optimism among Republicans skyrocketed and subsequently
tapered off among Democrats. Based on the data, it is clear that many
Republican-leaning investors may have missed out on the strong market gains
during the Obama years, and that many Democrat-leaning investors may have
missed out on the market rally that transpired during the Trump years.
With all the talk of concerns over
the global economy and weakening manufacturing, the consumer remains pivotal in
determining how much juice is left in this economic expansion. With that as a
backdrop, one other intriguing aspect of the above chart is that at present,
consumer confidence among Republican-leaning investors remains very high. Market
sentiment and economic activity are quite sensitive to consumer perceptions of
the future, and it certainly makes it more difficult for the economy to turn
toward recession if roughly half the population believes things are still
THE NUMBERS Sources: Index Returns: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends. Interest Rates: Federal Reserve, Freddie Mac
U.S. ECONOMIC HEAT MAP
The health of the U.S. economy is a key driver of long-term returns in the stock market. Below, we grade 5 key economic conditions that we believe are of particular importance to investors.
Our consumer spending grade remains an A despite a recent decline in retail sales numbers. US consumer confidence remains high, but we will be watching this metric closely over the next couple of weeks and throughout earnings season. The consumer has been the bedrock of the US economy through much of the current expansion.
Our Fed Policies grade has been increased to A- after the Federal Reserve cut its interest rate target by 25 bps following its most recent meeting. This marks the second time the Fed has cut interest rates in the past few months, but Chairman Jerome Powell hinted that he does not expect “a more extensive series of rate cuts” moving forward.
As was largely expected by markets, corporate earnings growth has been weak thus far in Q3 as a result of the global slowdown and trade policy uncertainty. Throughout earnings season, we will be paying closer attention to management commentary and updates to forward guidance, which are likely to have a bigger impact on stock prices.
The US economy added 136,000 new jobs in September, below the consensus expectations of analysts. However, despite the lower than expected job creation, there was evidence of an acceleration of wage growth. The labor market continues to look quite healthy.
Inflation is often a sign of “tightening” in the economy and can be a signal that growth is peaking. Recent inflationary data has increased slightly, but inflation remains benign at this time, which bodes well for the extension of the economic cycle.
Following a re-escalation of the US/China trade dispute, we have raised our “international risks” metric back to a 7. Other key areas of focus for markets include the ongoing Brexit negotiations, rising economic nationalism around the globe, and escalating tensions in the Middle East.
The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.
Joanne Kurtz, Executive Administrative Assistant Years at VNFA: 14 years (in March 2020) “I enjoy
working with my colleagues because they make me feel supported, and they
continuously motivate me to do my best.”
About Joanne: I am married to my
wonderful husband and have two adult children. We like to take the time to
enjoy the outdoors by visiting the Poconos and the beach. We also have an 11-year-old
yellow Labrador retriever, and she is a joy to our whole family. I enjoy
reading, exercising, cooking and eating healthy.
enjoy most about my job is helping clients and helping our team. There are a
variety of tasks that are involved which makes each day unique and enjoyable. Our
team benefits from making sure procedures are carried through for great
organization and communication which helps our clients meet their financial
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