There are bull markets, there are bear markets and there are smiling mules. However, since the current U.S. bull market set a longevity record when it turned 10 years old this past March, equities have moved back and forth, sticking stubbornly to a narrow range. Rather than a bull or a bear, we think this market is more accurately described as a mule with a mind of its own.
Recently, SEI Private Trust Company released their Economic Outlook for the third quarter entitled, “Animal Dispirits: From Aging Bull to Market Mule?” which we thought would be of interest. A summary of the conclusions is provided below:
- Long-time readers of the Economic Outlook know that we’ve leaned toward an optimistic view of equities and other risk-oriented assets for the past 10 years. In the instances that markets sharply corrected during this period—sometimes exceeding the 10% minimum drop from recent highs that qualifies as a moderate correction— we viewed the pullbacks as buying opportunities.
- Where do we go from here? We believe the U.S. economy remains in reasonably good shape and appears to be in little danger of actually contracting any time soon. Granted, the manufacturing and agricultural sectors are being stressed by the trade war with China. However, we think there is a limit to how far this deterioration in economic activity will go. Few economists, for example, would dispute that the U.S. consumer sector is in great shape.
- In terms of policy, the Federal Reserve (Fed) remains supportive. Policymakers voted twice this year to lower the federal-funds rate, first at the end of July and again in September (by 0.25% each time). Additional rate cuts are widely expected to come before year-end. We note that the Fed has already halted quantitative tightening, meaning that it is no longer letting its balance sheet contract as securities in its portfolio mature.
- A trade truce between China and the U.S. would be a relief, but it would be only one piece of a larger mosaic that must first come together. Getting the world back on a faster growth track will depend on an economic rebound in the domestic economies of China and Europe.
- Looking abroad, despite the rather solid financial position of U.K. households, confidence has been on the decline for U.K. consumers and businesses. In fact, both consumer and business confidence are nearing levels consistent with recession. Confidence measures in the eurozone, while off the highs of 2017, have not fallen to same degree.
- The decline in earnings growth from last year in Japan is surprisingly steep. Despite all their efforts, Prime Minister Shinzo Abe’s government and the Bank of Japan have been unable to spur a lasting reflation of the economy.
Our point of view
While we do not see a bear market on the horizon, in view of the uncertainties facing investors, the prediction game is even more challenging than usual. Predicting the future is a hazardous venture most of the time. In view of the uncertainties facing investors presently, the prediction game is, arguably, even more challenging than usual.
Accordingly, as always, we believe in a diversified approach to investing. Although maintaining exposure to equities and other risk-oriented assets can at times feel uncomfortable, it is our view that investors with long time horizons should avoid timing the market or making outsized sector or regional bets. We think it is best not to assume, for example, that the S&P 500 Index and growth stocks will always be the only games in town. The recent volatility and sharp style rotations in the past quarter should serve as reminders that trends do not last forever. When dealing with a mule market, try to avoid getting kicked in the face.
“In the financial markets, hindsight is forever 20/20, but foresight is legally blind. And thus, for most investors, market timing is a practical and emotional impossibility.” – Benjamin Graham
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Thank you for your continued trust and confidence in Stonebridge.
All the best,
About SEI Private Trust Company
Now in its 50th year of business, SEI (NASDAQ:SEIC) is a leading global provider of investment processing, investment management, and investment operations solutions that help corporations, financial institutions, financial advisors, and ultra-high-net-worth families create and manage wealth. As of Dec. 31, 2018, through its subsidiaries and partnerships in which the company has a significant interest, SEI manages, advises or administers $884 billion in hedge, private equity, mutual fund and pooled or separately managed assets, including $307 billion in assets under management and $573 billion in client assets under administration.