by Peter Jones, CFA
Vice President, Equity Research
Equities continued to rise steadily for the fourth consecutive week, reaching fresh all-time highs, as market participants digested several meaningful economic and policy data points. Manufacturing activity remains sluggish, as illustrated by another contractionary reading in the key ISM manufacturing survey. The U.S. consumer continues to be a workhorse, a theme we’ve been outlining for the last couple of months. So long as the consumer remains healthy … so too should the economy.
On Wednesday, the Bureau of Economic Analysis released third quarter GDP growth, which came in at 1.9 percent. While this number represents a material slowdown from 3 percent in 2018, the growth rate was stable in the second quarter and exceeded expectations for 1.6 percent growth. Digging into the details, it was the consumer who drove growth with personal spending increasing at a solid 2.9 percent clip, enough to offset the drag from a 3.8 percent decline in equipment investment. Not only was personal consumption strong, but residential investment contributed positively for the first time in over a year, helped by the decline in interest rates we’ve seen in 2019.
Wednesday also brought the Federal Reserve’s third rate cut since July, a move that was widely expected and priced into the markets. Beyond rate cuts, all eyes and ears were focused on commentary regarding the forward outlook for policy rates. Some may have been disappointed that the Fed indicated they won’t cut before the end of the year unless the environment deteriorates further.
On the other hand, the big positive for risk assets came from Chairman Powell’s response to the possibility of resuming interest rate increases in 2020. Powell signaled that in the event of a trade resolution and economic acceleration next year, the Fed is likely to let the economy run hot and not raise interest rates. Powell’s comments proved to be spectacular timing for the market given this morning’s employment report. Adjusted for the United Auto Workers Strike against General Motors, payroll growth came in at 170,000 versus expectations for 130,000. Even more, employment numbers for prior months were revised up by 95,000. Wages continue to increase at an impressive 3-percent clip, and even the labor force participation rate ticked higher.
A year ago, such a strong employment report would have stoked fears of inflation, more restrictive Fed policy, higher interest rates and thus the end of the expansion. But with the Fed taking interest rate increases off the table for the next several quarters, today’s report is nothing more than a bullish data point on the durability of the expansion. Once again, the U.S. consumer continues to shine. Despite these positive developments, we are more than 10 years into an expansion. Growth is slowing, corporate profits have stagnated, and it is unlikely trade issues will be resolved any time soon. As such, we believe it is prudent to maintain a neutral allocation to equities.
Week in Review and Our Takeaways
The S&P 500 reached new all-time highs this week and is up more than 23 percent year-to-date
The Fed will remain accommodative even if economic growth accelerates
Friday’s employment report was very supportive of a robust U.S. consumer. So long as the consumer is healthy, recession risk is very low
A neutral allocation to equities remains prudent, in our view