“It Ain’t Over ‘Til It’s Over” – Yogi Berra
If you are a softball fan – or a baseball fan – you’ve had the experience of watching a game where the outcome seemed certain – until the moment something unexpected happened, and the momentum turned in the other direction. If you’re rooting for the underdog team, it’s exhilarating. If not, frustrating and disappointing.
Continuing the ballpark metaphor, today’s economy has been sending signals that it is in its final innings. The stock market goes up and down in price trying to discern the direction of the game – now surging forward with a tax cut or solid economic data, now pulling back due to the prolonged trade war or slowing corporate earnings. Economic growth surges and fades as well, although over the long term the US economy has grown steadily, with an average annual rate of growth of 2.8% over the last fifty years. The recent economic cycle has been a weaker period, though a long one: growth has been positive every year for nine years running, but with an average of only 2.25%.
Super low interest rates have underpinned our stock and bond markets …distorting the risk landscape for investors.
Unprecedented low interest rates have underpinned our stock and bond markets for this period of growth, supporting prices but distorting the risk landscape for investors. For six years following the recession in 2009, rates were essentially 0%. Over the course of three years through the end of 2018, though, the Fed judged the economy finally strong enough to handle higher short term interest rates. Their target range reached 2.25-2.5% last December before clear weakness in economic growth led them to pause and allow the economy to adjust to higher rates.
Meanwhile, the entire global economy, according to well-known economist David Rosenberg, is “back on its heels.” That’s not a good place to play from in any sport. German manufacturing and industrial production have been declining since the beginning of the year, and housing demand in the US hasn’t budged despite a full 1% decline in mortgage rates over the last nine months. Other immediate economic indicators that are in the red on a year-over-year basis include container port shipments, global semiconductor sales, railroad traffic, coal production, freight shipping, lumber production, electricity output, and corrugated paper production.
The possibility of a pause in stock prices to match the Fed’s pause is quite likely here as we enter the “extra innings” of a lengthy economic expansion. One key to surviving – and thriving – in extra innings is avoiding injury, especially to the pitcher. The team manager must use caution to avoid exhausting both starting and relief players, and ensure their team can hold its ground. Looking at the economy and the market we ask – how strong is the bench? Are there new pockets of growth that can support the economy and the stock market – with the Fed’s help – or will the broader slowdown in growth dominate? Is a strong US jobs report (released July 5th) a true indication of continuing strength?
Long term we remain bullish on the economy, but short term we expext a pause.
On the latter question, we would say “no.” All of the jobs growth in June was in one category – workers who have taken on an extra job. This growing gig economy in itself is not a good harbinger for sustainable growth, either, as most gig workers struggle to stay ahead of their bills. Recently many companies with gig workers have been trying to cut expenses, and some workers have seen declines in earnings of up to 30-40%. Long term we remain bullish on the economy, but short term we expect a pause.
In our client portfolios, we became a little more fully invested early in the year following the late 2018 decline. We increased our real estate allocation along with duration making our bond portfolios longer term. Both real estate and longer duration bonds have benefited from interest rates retreating this year. We remain cautiously allocated in stocks, however, and are wary of the building risk in lower quality corporate bonds. Overseas and emerging markets have had more subdued growth than the US, and remain more reasonably valued; we are slightly overweight in both those categories.
We plan and invest for the long-term with our clients, for the entirety of a season and a deep playoff run. Now, in extra innings with a small lead on the scoreboard, we will be pitching very carefully.
This is a general assessment of client portfolios and does not reflect the specific circumstance of every client.
 Rosenberg, David “Breakfast With Dave,” Gluskin Sheff Economic Commentary, July 2, 2019 [paywall
 Rosenberg, David “Breakfast With Dave,” Gluskin Sheff Economic Commentary, July 5, 2019 [paywall]
 June 2019 Employment Report: Payrolls, US Department of Labor, cited in “Breakfast With Dave,” David Rosenberg, Gluskin Sheff Economic Commentary, July 8, 2019 [paywall]