The Sharp Financial Group Reviews the Economic Moment: Q1 2019

When you’re busy running your business, it can be difficult to stay current with the latest market trends. Subsequently, that means it can also be difficult to know what decisions you should make to maximize your return and protect your investments. How might trade negotiations affect your portfolio? What might leading indicators predict about the short-, medium-, and long-term outlook? How should business owners plan the next quarter, year or five years?

Sharp’s Chief Investment Officer, Alain Van Loo, recently hosted a webinar to address many of these questions, including a reflection on where markets have been in the recent past and predictions over where the market will be in the near and long-term future. Here is a summary of the topics covered:

A High-Level Overview of the Economic Moment

In 2018, the US produced a 3.1% GDP, which is the highest annualized growth rate since the 2008 financial crisis. As we move into 2019, Sharp estimates that the GDP growth rate for 2019 won’t be quite as robust and will be closer to 2.4%. Earnings are starting to decline. Concerns about global trade are hampering the economy. Monetary policy remains in a state of flux.

What Sharp’s Models Predict

Sharp’s financial models consider short-term, medium-term, and long-term indicators. The short-term indicator was positive from the end of December 2018 all the way through the end of the first quarter of 2019. But as the second quarter begins, that short-term indicator has shifted from positive to more neutral. Medium-term indicators, which consider quarter over quarter or several quarters at a time, were also neutral for the first quarter. The market started basing in January and February and didn’t pick up momentum again until March or even April. But now that the momentum has picked up, medium-term indicators are shifting into solidly positive territory. Finally, long-term indicators likewise remain bullish.

A Comprehensive View of Global Markets

Although many observers assume that the S&P and Dow present a complete picture of financial markets, the reality is that there are many additional components. For one, emerging markets have seen significant growth. Granted, much of this growth was recovery from 2018 when Asian markets were down by 30%. Additionally, the real estate market as a whole has outperformed the S&P by 15%. 

Growth stocks such as Amazon, Google, and Tesla outperformed value stocks, which include established firms such as IBM and GE, by 9%.

Since the 2008 financial crisis, commodities have been on a downward trend, and are down 75% on a relative value on average. But in 2018, commodities have stopped going down.

Alternatives were one of the few dark clouds of 2018, and they were down 8%.

Trends to Watch

No matter how trade negotiations progress, there will likely be an impact on the US dollar. If the US dollar continues to rise, it may be a double-edged sword. On the one hand, a rising US dollar will allow American firms to purchase goods and services from around the world at a more inexpensive rate. But at the same time, American goods and services will be more expensive for international consumers – which may lead them to seek alternatives. As a result, the net impact on the economy as a whole, on specific industries, or even on individual firms can vary vastly as the value of the dollar rises and falls.

Q&A with Webinar Attendees

Before the session concluded, Van Loo fielded the following questions from attendees:

How many more interest rate hikes do you expect?

“Truly, my answer is zero. I think it’s going to be very difficult for the U.S. economy to take another hike or two.”

What’s the biggest risk to the stock market this year?

“The biggest risk is central banks. Tell me what central banks are going to do and I can tell you what the risk is going to be in the stock market. And I would encapsulate in that term risk both upside and downside. It's not just downside. If the central banks get very dovish and their optimal models suggest that they need to start easing or really get aggressive and it's truly a globally coordinated effort, you can see a massive tail incoming or vice versa.”

“Is a trade war with China best classified as a headwind for stocks or will this eventually be a tailwind?”

“I think a deal will be struck in the next three to six months, but I don't have any inside baseball to tell you that that's really the duration for it. That covers about $200 billion in goods and services and I think once the dam breaks on that, you'll get some quick deals that fall into that with Europe and potentially with Japan.”

“Lastly, any personal thoughts on Bitcoin?”

“I think that the blockchain is here to stay. It's definitely going to change the way we transact in a variety of levels of our lives on the corporate and personal level. It's here to stay and it's efficient. It uses an enormous amount of energy, but it also produces efficiencies that we haven't seen in our economy.”

Key Takeaways for Business Owners from The Sharp Financial Group:

1. It is important to maintain a holistic view of the market and the economy together
2. More often than not these days, the data between the two can temporarily diverge and create conflicting signals.
3. A key takeaway is that Q1 2019 stock market was a total opposite to the Q4 2018 stock market
4. The severe bounce back is yet to be fully understood, but most importantly the Federal Reserve recognizes that it may be done hiking for some time and that might be some of the wind beneath the stock markets wings.
5. This shift can also clearly be seen in the fixed income market, as market rates have collapsed and revisited the low yields that we last saw in 2017.
6. This plays out in lower interest rates on the core rates of the economy – mortgages, loans and credit rates.
7. We believe that this lower rate regime will last for quite some time, as the rest of the world seems to be slowing down as well.
8. The Q1 2019 economy, though, was signally a slightly different POV than what the market was digesting at the same time.
9. Continue to see fundamental weakness in inflation (which is our biggest worry at the moment), global orders and corporate earnings, and interestingly enough in many of the sentiment indicators that the market pays attention to (ISM, etc…)
10. At the core, geopolitical concerns (China trade, tariffs in general, Brexit, Europe and 2020 election) remain the largest driver of both performance and volatility in both the markets and economy.
11. We anticipate this volatility to remain for the foreseeable future
12. What to watch for: the performance of the USD.
13. With USD having outperformed other major currencies, this can act as a tax/tariff on goods and services when trading externally.
14. We remain cautiously optimistic for the medium term, anticipating that deals will be struck, however, the prospective timelines for the economy and markets to calm down are a little opaque for us at the moment.

Disclosures

Sharp Financial Services, LLC d/b/a The Sharp Financial Group (“Sharp Financial”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Sharp Financial and its representatives are properly licensed or exempt from licensure.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.