Investment Currents: Outlook for Second Half of 2019
The Girard Investment Committee, under the direction of Timothy Chubb, Chief Investment Officer, recently met to review and update key performance indicators for the remainder of the year. As we concluded in earlier updates, this year has proven to be one marked by uncertainties related to tariffs and decelerating, albeit modest, economic growth globally. Risks to our updated forecast include sustained trade tensions between the United States and China, a more permanent cease fire, or larger scale resolution which would improve our growth expectations.
The following is the outlook in key areas as we head into the second half of the year, which begins with U.S. investors celebrating a historic event – this July the U.S. economy records 121 months of economic expansion – the longest on record.
GLOBAL GDP: 2.90% – 3.20%
We expect the global economy to continue to grow this year, but at a slower pace than last year. If growth projections are realized, it should continue to keep inflation at moderate levels and give central banks little reason to tighten conditions further. Recent weakness was in part due to the impact of tariffs and trade tensions, but also likely due to global monetary policy responding too strongly to above-trend growth in prior years. In the first half of this year, investors saw global central banks keep their foot off the gas after a decade of accommodative monetary policy. Now, attention has begun to shift toward whether more accommodative monetary policy is needed to help sustain the economic expansion.
U.S. GDP: 2.00% – 2.30%
After U.S. GDP logged a 3%+ growth rate in the first quarter, we expect economic growth to track lower as the year continues. This downshift lower is largely due to the initial rush of fiscal stimulus slowing and geopolitics weighing on the minds of investors and business leaders. The U.S. economy should see growth moderate to trend, despite slowing a bit, as the economy continues to grow through an unflappable U.S. consumer who has seen strength from employment, growing wages and manageable inflation. Our Investment Committee does not anticipate a recession this calendar year.
UNEMPLOYMENT: 3.50% – 3.80%
With an economy that is currently beyond “full employment,” we expect new monthly job gains to slow which should be expected after such a long period of employment gains. The unemployment rate will tiptoe lower this year, but do not be spooked by a month or two when the rate ticks higher. This is common late in the cycle as the market is more sensitive to seasonal workers or climate impacts to employment. The current jobless rate is 3.7%.
INFLATION: CORE PCE 1.60% – 1.90%
We believe inflation will remain tame again this year thanks to exciting new technology disrupting many industries in addition to secular pressures of globalization. While monthly job numbers and wage growth continue to be strong, even with historically low unemployment, inflation data continues to have the Fed fooled. This will likely be the rationale for the Federal Open Market Committee (FOMC) to cut interest rates later this quarter.
FEDERAL FUNDS RATE: 1.75% – 2.25%
The Federal Reserve, led by Chairman Jerome Powell, did not raise interest rates this quarter after raising rates four times last year. Powell signaled that the economy is healthy, but economic growth or inflation are not strong enough to warrant further policy tightening at this time. The FOMC also hinted that rate cuts could be near and several officials seemed to tie their policy outlook to how trade policy develops. Like the box office is giving us flash backs of the nineties, U.S. central bank policy may mirror 1998 as the Fed looks to slash rates to sustain the expansion. Looking back more than 20 years ago, threats to the U.S. economy ended up being exaggerated and a small amount of easing led to another two and a half years of economic growth and market gains. We are revising our forecast to accommodate the Federal Reserve cutting rates at least once this year.
U.S. DOLLAR: NEUTRAL
We remain committed that the U.S. dollar will remain range-bound against global currencies as it has for most of this year already. The U.S. dollar strengthened in 2018 as U.S. economic growth outpaced many other developed countries and forced the Federal Reserve to raise rates. With the Fed, and other global central banks considering cutting benchmark interest rates, the dollar should remain neutral this year or even weaken, should the U.S. and China cooperate on trade and global growth reaccelerates.
CORPORATE EARNINGS: 2.00% – 4.00%
As we anticipated earlier this year, corporate earnings growth has slowed to a more reasonable range after spiking 20% following sweeping U.S. tax reform. We are hopeful revenue growth will clip 5% with all eleven sectors in the S&P 500 expected to post top line growth. Rising costs, such as labor, will pressure profit growth. A weaker dollar, de-escalating trade strain and falling oil prices all present potential tailwinds for earnings growth to drift higher throughout the latter part of this year.
INTEREST RATES 10-YEAR U.S. TREASURY: 1.90% – 2.40%
Long-term interest rates move based on the prospects of economic growth, consumption and inflation. U.S. Treasury yields slid lower during the most recent quarter as economic data was mixed and the FOMC hinted at cutting interest rates in the coming meetings. It was also announced that the balance sheet “unwind” will conclude in July. As a result of this news and slower growth, our expectation for bond yields has been revised lower.
The apparent influence of the bond market recalls the comment by political strategist James Carville, “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” Carville spoke in the 1990s when the bond market was worried about inflation risks, but the same logic applies today with the financial markets potentially intimidating the Fed and other global central banks to ease monetary policy.
Every forecast is predicated on the information currently available and subject to the risk of unforeseen events, and ours is no exception. Our outlook is positive as we expect the global economy to continue to expand, inflation to remain stable, and the unemployment rate to continue to fall. The forecast also is based on key assumptions that include accommodative monetary policy by global central banks and a cease fire or trade deal between the United States and China.
This document contains “forward-looking statements” – that is, statements related to future, not past, events. In this context, forward-looking statements address our reasonable expected and anticipated outlook for various aspects of the economy and markets. Such statements are based on the Investment Committees beliefs as well as assumptions made by and information currently available to the Investment Committee. Statements are subject to risk and uncertainties, which could cause actual results to differ materially from those anticipated. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.
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