Market and Economic Commentary

The U.S. economy is healthy but probably has seen the best growth in this economic cycle.  Small business optimism, job openings, and income growth are below their best levels of last year.  Slowing international trade is starting to have a negative effect on the U.S. economy.

Real U.S. GDP growth is forecast to fall below 2.0% in 2020.  As Federal Reserve Chairman Jerome Powell recently pointed out, targeted 2.0% inflation also has become elusive.  The GDP deflator slipped to a mere 0.5% during Q1.  Low inflation at home is driving long-term yields down – as are negative yields abroad.

International trade issues (slowing plus tariff concerns) continue to negatively impact growth and could drive the U.S. into a recession if not resolved this year.  European economic indicators are pointing to a manufacturing recession, and China’s stimulus measures have not yet had a meaningful impact.  The U.S. yield curve reflects these concerns.

Central bankers around the world have acknowledged the worldwide slowdown and are setting the stage for more stimulus measures.  Despite the slowing economic indicators, investors are reminded to not “Fight the Fed” when it is in easing mode.

Decelerating international trade is starting to weigh on earnings growth.  Forward estimates show +3.8% growth for 2019, but the outlook continues to drift lower.  Currently, 2020 earnings are expected to grow +11.0%, but that figure is unrealistic unless international trade picks up.

From a technical perspective, the market has worked off the extreme overbought readings from last quarter.  Investors remain enamored with defensive Utilities, while Industrials and Transportation stocks lag.

Download the full report in pdf here: IMVA Investment Review-July 2019