Outlook Unchanged, But It May Be Time to Invest More Internationally
Just as the 2nd Quarter came to a close and the outlook for stocks was on the rise (see the attached link to our July commentary below), the trade war with China flared up again. This sent stocks spiraling downwards alongside renewed concerns about global economic growth and a potential recession.
Over the ensuing two months however, a partial trade agreement is assumed to be in the works, the Federal Reserve lowered short-term interest rates further, and indicators of a recession have subsided. The re-printing of our last commentary is intentional: to both reinforce our unchanged outlook for stocks and the economy, and to focus attention more on longer-term investing rather than headline-chasing shifts in portfolio allocations.
Though there are certainly always risks present in stock investing, our baseline scenario remains bullish for stocks:
The trade war with China is on pause. Though it looks like the most difficult issues remain unresolved, a pause for now is in the interests of both sides. Less volatility from public trade negotiations is supportive of stocks.
The Federal Reserve continues to be accommodative and recently lowered interest rates further, stating they would permit more inflation before raising rates again.
The domestic jobs market and housing sectors are strong, and the consumer continues to power the economy forward (though at a weaker pace). Spending and investment by US businesses has lagged and could really help economic prospects.
Longer-term interest rates have begun to rise, which is a net positive for lending and the economy – the caveat being a re-steepening of the interest rate curve can be the beginning of an historical 18-24 month wait for a recession. We will monitor this!
Pressure is building in Europe for some form of fiscal stimulus, mostly on the part of Germany and the Netherlands. Consequently, European stocks (and international stocks overall) are beginning to outperform US stocks for the first time in a decade. We will be looking to increase exposure to international stocks in the coming months.
The baseline expectation is that conditions are supportive for stock investing now, but we’ll look to be cautious next May/Summer as the markets potentially look forward nervously to the Presidential election and to a possible 2021 recession.