The Numbers & “Heat Map”

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

US ECONOMIC HEAT MAP
The health of the US 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.

CONSUMER SPENDING

A

We have downgraded our consumer spending grade to A from A+ following weaker than expected December retail sales data and some declines in consumer confidence surveys. However, monthly data can be volatile and we still believe that the US consumer is in a healthy position.

FED POLICIES

C-

The Federal Reserve implemented four interest rate hikes during 2018, and while the rate hike cycle appears to be on pause for now, rising interest rates tend to reduce economic growth potential and can lead to repricing of income producing assets.

BUSINESS PROFITABILITY

B+

Corporate earnings remain strong, but we anticipate earnings growth will taper off in 2019. We are also beginning to see a higher number of companies reducing forward earnings guidance, a sign that earnings growth may have reached its peak in 2018.

EMPLOYMENT

A

The US economy added just 20,000 new jobs in February, which was far less than expected. This was the weakest number since 2017, but job gains from both December and January were revised upwards. Despite the weak report, the labor market remains one of the strongest components of the economic backdrop at this time.

INFLATION

B

Inflation is often a sign of “tightening” in the economy, and can be a signal that growth is peaking. The inflation rate remains benign at this time, but we see the potential for an increase moving forward. This metric deserves our attention.

OTHER CONCERNS

INTERNATIONAL RISKS

5

The above ratings assume no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 5. These risks deserve our ongoing attention.

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.

The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Four days of stable market gains were erased on Friday as renewed concerns over the trajectory of global economic growth weighed on interest rates and equities. Early in the week, the primary focus of investors was on the Federal Reserve, which opted to hold interest rates steady following its second policy meeting of 2019. During his post-meeting press conference, Fed Chair Jerome Powell highlighted recent moderation in U.S. consumer and business spending and cited a more meaningful slowdown in Europe. A summary of individual policymakers’ projections for the future of interest rates revealed a pronounced dovish shift in future policy expectations, and markets reacted positively. Eventually however, news on Friday morning that activity in the German manufacturing sector had fallen to a six-year low seemed to spark a broad market selloff that knocked stocks off of their five-month highs.

Watching the Yield Curve
Last week, the Federal Reserve signaled that it may leave interest rates unchanged throughout the remainder of 2019, and the news pushed bond yields to their lowest levels in over a year. Market prices now fully reflect the assumption that the Federal Reserve is finished with its tightening cycle and even suggest about a 30% chance of a rate cut in 2019.  The massive shift in expectations over the past few months has led to a more pronounced inversion of the yield curve, where the yield on a 10-year treasury has now dropped below the yield on a 3-month bill. We still believe that the probability of a U.S. recession in the near term remains quite low (though it is slightly higher than it was just a few months ago). Further, we caution investors against reading too much into the shape of the yield curve or using it as a trading signal. While the yield curve has historically been a relatively reliable indicator of future economic conditions and should still be monitored closely, we believe a broader view is warranted in the current environment. Monetary policy has played such a massive role in driving interest rates over the course of this economic cycle, that it may have clouded the signaling power of traditional indicators like the yield curve. As the Fed begins to moderate its approach to monetary tightening, perhaps some clarity will be restored. But in the meantime, we believe investors would be best served by sticking to long-term asset allocation targets and utilizing the market’s strong start to 2019 as an opportunity to rebalance back to those targets.

“Your Financial Choices”

The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®.

This week, Laurie will discuss: Your Tax Returns – amending, extending and paying.” Laurie will take your calls on this or other topics at 610-758-8810 during the live show, or via yourfinancialchoices.com.

Recordings of past shows are available to listen or download  at both yourfinancialchoices.com and wdiy.org.