by Connor Darrell CFA, Assistant Vice President – Head of Investments
Global equity markets pushed higher last week on the back of clarifying results from the UK’s third general election in five years and a preliminary agreement on a phase one trade deal between the U.S. and China. 

In the UK, Boris Johnson’s conservative party won a sizable majority in Parliament, enabling him to continue as Prime Minister with a much stronger foothold on guiding his agenda forward. For markets, this represents a far smaller probability of a “no deal” Brexit and sets the stage for the UK to finally leave the European Union early next year. A smooth Brexit transition should improve the outcome for UK domestic companies and improve sentiment in equity markets heading into 2020. However, the uncertainty is not completely vanquished, as Johnson’s next challenge will be the difficult task of negotiating new trade terms with the rest of Europe. If progress in these talks proves more difficult than expected, markets could experience additional Brexit-related volatility even after the official Brexit event has played out.

On the U.S./China front, President Trump and Chinese Vice Minister of Commerce Wang Shouwen each confirmed last week that the two countries have arrived at a preliminary agreement which is said to include the cancelation of tariffs scheduled to take effect this week. China also agreed to unspecified agricultural purchases from U.S. companies, some protections for intellectual property, and to opening its doors to U.S. based financial companies to do business in mainland China. Stocks, particularly in Emerging Markets (of which Chinese equities make up a large fraction of total outstanding market cap), reacted positively to the news. However, it should be noted that while tangible progress should be viewed favorably by global investors, this is far from a comprehensive deal and there remain difficult negotiations ahead. Many of the key issues that the United States is seeking to address cut at the heart of Chinese economic policy, setting the table for uncertainty surrounding the tenuous relationship between the two powers to linger into next year and beyond.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Global equity markets ended the week higher as Friday’s very strong U.S. employment report helped erase losses from earlier in the week. Of particular note was that the report showed evidence of strong growth in the manufacturing sector, an area which has been a source of concern due to the uncertainty of global trade. From almost every angle, the report provided reason for optimism. The unemployment rate ticked back down to match its 50-year low of 3.5% and wage growth was over 3%; well above the current inflation rate. The data continues to suggest that the strength of the U.S. consumer is helping the economy to weather the impact of the ongoing U.S.-China trade war.

The Impact of E-Commerce on U.S. Employment
No matter how the data is sliced and diced, Friday’s jobs report was a blockbuster. But it’s interesting to note some trends that have emerged with respect to employment patterns during the holiday season. It’s no secret that over the past several years, holiday shoppers have begun to favor making purchases from the comfort of their own homes rather than braving the elements and long lines at brick and mortar retailers. As a result, there’s been a shift in hiring practices for seasonal employees in the jobs data. Last week’s employment report showed a 6% decline in retail employment gains compared to just one year ago, but that loss was more than made up for in other areas such as wholesale (likely a result of more hiring at warehouses and fulfillment centers supporting online shopping). It’s still debatable whether the methodology used to track retail sales data does enough to capture the massive shift in consumer preferences toward online shopping, but this week’s round of retail sales data should help lend further support to the idea that the U.S. consumer can continue to carry the expansion forward. 

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Equities climbed higher during the holiday shortened week, bolstered by rising optimism surrounding the anticipated “Phase One” trade deal between the U.S. and China. It’s beginning to look as if the proposed agreement will be more comprehensive than many had anticipated, with stronger intellectual property protections being included in the discussions.

The week also brought some encouraging economic news. Data on new home sales came in above analyst expectations and durable goods orders rebounded from recent lows. Additionally, the second estimate of U.S. GDP for the third quarter was revised upward and now stands at 2.1%. Particularly encouraging was that the upward revision was due to a smaller decline in business investment than was initially measured, suggesting that the impacts of the ongoing trade dispute may be starting to wane.

Some Perspective on the National Debt
Aside from the constant calls in the news media for an “impending recession,” there are few issues that seem to worry everyday investors more than the national debt (there’s even a popular website called “U.S. Debt Clock” which keeps a running tally). For many, the rising debt is an albatross that hangs over the markets and threatens the long-term sustainability of economic growth. However, it’s important for us to keep things in perspective, and even more important to keep our concerns as private citizens and taxpayers separate from our convictions as long-term investors.

The national debt continues to rise, and with the government currently running at a deficit, that trend is likely to continue well into the future. Looking through recent history, it’s clear that the size of the national debt and the annual budget deficit with which the government operates are, in large part, results of the fiscal decisions made during the 2008 financial crisis. The government responded to the crisis by ramping up spending in order to keep the financial system from collapsing and faced a $1.4 trillion deficit in 2009 as a result. At a little less than $1 trillion, the current deficit is a bit smaller than it was in the depths of the crisis but is still a staggeringly high number. Regardless of the magnitude of the deficit, it’s most likely that investors do not need to live in fear when it comes to their portfolios. When discussing debt levels, it’s not the absolute level of debt or annual deficits that are most important, but rather their size in relation to the overall economy.

With that in mind, while current deficits are inarguably high, they are still within historical norms after considering the size of the U.S. economy has also grown significantly. Even if the current deficit as a percentage of GDP (which currently sits at about 3.8%) were to rise by several percentage points over the next year or two, it will still remain well below the 10% levels observed in 2009 and right on par with where things stood back in the early 80s. In other words, while debt is not something to be ignored, it is unlikely to have a direct impact on the profitability of companies or the yield spreads on bonds. Another important consideration when thinking about the potential impacts of high debt levels is the cost of that debt. With interest rates still very low, the cost of servicing debt is much lower than it has been at most other points in our nation’s history, which makes carrying higher levels of debt more tolerable. For most investors, the current level of national debt should rank low on the list of potential concerns from a portfolio management perspective.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Markets were largely stagnant last week as investors continued to wait patiently for further developments in the U.S./China trade negotiations. On Friday, Chinese President Xi Jinping stated that the Chinese wish to reach a “phase one” deal with the United States that is based upon “mutual respect and understanding,” further reiterating that while he does not want the trade war to escalate further, he would push back on U.S. demands when deemed necessary. As the rhetoric from Washington continues to suggest that a phase one deal is “very close,” the U.S. Department of Commerce issued a 90-day extension for U.S. companies to continue doing business with China’s Huawei for the third time. Bond yields moved modestly lower during the week as the lack of material development in the trade discussions seemed to outweigh some positive economic signals, which included evidence of stabilization in global manufacturing activity.

Happy Thanksgiving
In honor of one of America’s favorite holidays, we wanted to share some fun facts (courtesy of JP Morgan Asset Management and WalletHub.com) about the Thanksgiving season:

• This year, the average cost of a 10-person Thanksgiving dinner is $48.91, only $0.01 higher than last year. Why such a small increase? As a result of ample Turkey supply, the price of a 16-lb. turkey decreased by $0.91 compared to last year and is expected to cost about $20.80.
• Each year, American spend an estimated $550 million on Thanksgiving turkeys. At a price of $1.30/pound, that’s over 423 million pounds of Turkey.
• In 2018, Americans spent over $3.7 billion while shopping online during Thanksgiving Day.
• Over 54 million Americans are expected to travel for this year’s holiday (the most since 2005). 89.4% of those travelers will drive to their destinations.
• The average shopper spends $313 over the five-day thanksgiving shopping period (Thanksgiving Day thru Cyber Monday).
• The NFL’s three-game Thanksgiving schedule pulled in nearly 79 million combined viewers last year.
• The Thanksgiving football tradition dates back to 1876, when Yale defeated Princeton in a game played in Hoboken, NJ.
• In a survey of what Americans are most thankful for, the most popular responses were Family (88%), Health (77%), and Personal Freedom (72%), with Wealth (32%) being one of the least popular choices.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
With the exception of emerging markets, most global equity indices gained ground last week as investors continued to wait patiently for new details on the progress of the U.S.-China trade negotiations. Since learning last month that a “Phase One” deal was close to being reached, markets have been deprived of any substantive news as to whether there has been real progress. The apparent improvement in U.S.-China relations over the course of the past couple of months has helped to alleviate some pressure on global equities, and some of that relief came through on corporate earnings calls. During these calls, it is not uncommon for CEOs to discuss the global landscape as they explain company performance throughout the quarter. According to Factset, the third-quarter earnings season brought with it a 13% reduction in the number of companies commenting on “tariffs” when discussing quarterly performance. Unsurprisingly, tariffs were still a major talking point for corporate leaders throughout earnings season, particularly among large industrial conglomerates, but the reduction is a sign that companies are beginning to look beyond the near-term uncertainty.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Fading fears of a global recession helped push risk assets higher while traditional safe-haven assets such as bonds underperformed. U.S. equity indices achieved new all-time highs as several signs of improvement in global economic conditions eased investors’ concerns. Markets cheered marked improvements in both non-manufacturing and manufacturing PMIs, which help to evaluate the confidence of business leaders. There were also encouraging signs from European consumer data, where retail sales rose 3.1% year-over-year. The reassuring data led to an increase in longer term bond yields and a steepening of the yield curve, resulting in negative returns for the major bond indices.

With Q3 earnings season close to wrapping up, FactSet Research is reporting a blended earnings growth rate of -2.4% year-over-year. With revenues rising 3%, the decline in corporate profits helps to underpin the impacts that rising costs have had on businesses coping with the fallout from the U.S./China trade dispute. Despite the decline, the overall numbers have actually exceeded analyst expectations, and many companies have seen their stock prices rise following earnings releases; yet another sign that things may not be quite as bad as many investors may have thought.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Equity markets climbed higher last week, bolstered by healthier than expected corporate earnings and a strong October jobs report which also contained upward revisions to prior data. In addition to the stronger than expected job growth, Friday’s employment summary also revealed a healthy increase in hourly earnings of 3%, which is handily higher than the current rate of inflation and an excellent development for the U.S. consumer. 

The Federal Reserve implemented a widely anticipated quarter point rate cut on Wednesday and bond yields trickled lower as a result, which led to positive returns for bond investors. In his comments following the Fed announcement, Chairman Jerome Powell signaled to markets that the economic fundamentals would need to deteriorate significantly before the Fed would move to cut rates further, and we may now be entering the first period of steady policy rates for quite some time.

First Look at Q3 GDP Yields Positive Signs
According to advance estimates of Q3 US GDP figures released last week, real GDP grew at a rate of 1.9% during the quarter, which was faster than the consensus forecast of 1.6%. Given the Q3 data looks a bit lower than what was observed last quarter, the data provided further confirmation that the U.S. economy is slowing down but is not stalling in a way that many have begun to fear. Consumption growth was once again the primary driver of growth in GDP, with business investment and net exports offsetting some of the contributions from consumption for the second straight quarter, which illuminates some of the impacts of the U.S./China trade dispute. As the U.S. and China continue to inch closer to a “Phase One” trade deal, sentiment surrounding business decisions may have the opportunity to recover, but the length of the economic expansion will be largely driven by the consumer, which continues to benefit from wage growth and a historically healthy labor market.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Stocks continued their positive start to the fourth quarter as markets grappled with a mixed bag of corporate earnings results, additional delays in the Brexit negotiations, and a lack of further developments in the U.S./China trade dispute. The United States and China are reportedly close to a “phase one” agreement which may be signed by next month, but with both sides interested in projecting strength to the rest of the world, it may be another long wait before a “phase two” agreement is reached. International stocks have outperformed U.S. stocks so far in the fourth quarter as optimism surrounding trade has improved.

Interest rates moved slightly higher during the week, with the 10-year Treasury reaching the 1.80% mark. Rates are likely to take center stage this week as the Federal Reserve convenes for its penultimate meeting of 2019. Markets are expecting another rate cut, which would be the third this year.

Cash Not What It Used to Be
With both stock and bond markets generating strong returns in 2019 despite rising economic and geopolitical uncertainty, many investors have grown concerned about future market returns. In a recent poll conducted by Barron’s, the percentage of professional money managers calling themselves “bullish” has decreased to its lowest level in 20 years. As a result of waning optimism, many investors have begun pondering the role of cash in a diversified portfolio, and our general belief is that it still pays to stay invested. The chart below provides a picture of the true return on cash when factoring in inflation. Since the financial crisis, cash yields have been extremely low as a result of aggressive monetary policies, and with the Fed no longer raising rates, it is unlikely that cash yields will be moving higher in the near future. Adjusting for inflation, investors who choose to sit things out in cash are still losing significant purchasing power over time.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Most of last week’s action took place on Friday, when the first signs of meaningful progress toward an eventual trade resolution between the U.S. and China broke into the news cycle. Markets rallied in reaction to the announcement from President Trump that he and Chinese officials arrived at an agreement for China to resume purchases of U.S. agricultural products and to begin addressing issues related to intellectual capital. Ultimately however, many were quick to point out that while the progress is a sign that the two sides are willing to work with one another, this first phase of an agreement is far from a finished product and does not address the most pressing issues that face negotiators; many of which are related to technology, cybersecurity, and intellectual property theft.

The positive sentiment from the trade front pushed a sense of optimism through financial markets and helped to steepen the yield curve, which led to negative returns in the bond market. With the economic calendar dormant this coming week, most of the market’s focus will remain on geopolitical concerns like trade and Brexit negotiations, as well as the beginning of Q3 corporate earnings season, which could provide investors with a better glimpse into how the recent slowdown in manufacturing has impacted corporate profits.

We provide our perspective on many of the above issues in our most recent quarterly commentary, which is available on our website – valleynationalgroup.com/Q32019

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Equities:
It was a bit of a seesaw quarter for equity investors, as the deepening trade conflict with China, concerns over global economic growth, and heightened geopolitical uncertainty all combined to stoke volatility in markets. And as if these issues weren’t enough for investors to grapple with, it was announced in late September that Democrats in the House of Representatives will move forward with impeachment proceedings against President Donald Trump. Yet despite all of the negative headlines, equities still managed to push modestly higher during the quarter, with the YTD return on the S&P 500 rising above 20%. International markets were unable to match the returns in U.S. equities however, with most foreign stock markets sliding lower during the quarter.

Bonds:
Bond markets continued to rally as interest rates moved lower throughout the third quarter. Longer-term interest rates tend to be closely aligned to investors’ collective expectations of future growth and inflation, and both have failed to materialize to the extent needed to sustain higher interest rates. From a growth perspective, the collective global economy has continued to show signs of weakening, and it is possible that some countries in Europe (such as Germany and Italy) may soon find themselves in recession. Inflationary pressures have ticked up recently as a result of the tight U.S. labor market and U.S. tariffs but could also be tamed if the U.S. and China are able to arrive at some kind of trade resolution, which remains our base-case scenario.

Furthermore, trillions of dollars’ worth of foreign bonds now trade with negative yields, a concept that is difficult for even many financial experts to truly come to terms with. Regardless of the reasons behind this phenomenon or even its long-term impacts on borrowers and lenders, it has undoubtedly created a powerful surge in demand for U.S. bonds, which remain one of the best options for yield-starved global investors. With few other places for bond investors to go, the prices on U.S. bonds have continued to be bid upward, pushing yields even lower.

Amazingly, it wasn’t very long ago that some bond market experts were questioning whether the Fed’s balance sheet runoff would lead to a surge in supply that might cause yields to spike meaningfully higher! In our view, the rapid transition from investors fearing rates might surge too quickly to those same investors struggling to find healthy yields at all is a testament to the unpredictability of markets and an argument for maintaining a balanced approach to portfolio management.

Outlook:
The third quarter was filled with uncertainty, much of which will not be resolved for some time. But one thing that was made abundantly clear as the quarter progressed was that in the eyes of the Federal Reserve, sustaining the expansion remains of high importance. In his September press conference, Jerome Powell stopped short of stating that the two recent rate cuts were part of a broader easing cycle, but it is becoming increasingly obvious that the market expects the Fed to keep its foot on the gas with respect to monetary easing. We believe however, that investors should pay more attention to economic fundamentals than to the Federal Reserve, as eventually, the Fed’s influence will wane and all that will be left to drive markets will be traditional factors such as economic growth and earnings. The evidence is mounting that the fundamentals are starting to flash warning signs for investors, but as has been the case throughout much of the past two years, the wild card remains trade. If the U.S. and China can reach a trade agreement, there could be room for measurements like manufacturing activity to rebound and for the expansion to be sustained even longer. In any case, with the strong returns achieved by both stocks and bonds throughout the first three quarters of the year, it is likely an excellent time for investors to rebalance their portfolios back towards long-term targets.

VIDEO: Q3 2019 Market Commentary
Connor Darrell CFA, Head of Investments, shares Valley National Financial Advisors’ summary of the third quarter and its impact on investors and portfolio recommendations. WATCH NOW