Broker Check
Quarterly Market Update: U.S. Economy Holds Strong Despite Volatile Year in the Stock Market

Quarterly Market Update: U.S. Economy Holds Strong Despite Volatile Year in the Stock Market

| October 07, 2019

Each quarter, the Pinnacle team will share an overview of notable economic changes and projections for the future to help you keep tabs on your portfolio.

The saw-tooth pattern we’ve seen in the stock market this year is typical of a late-cycle environment where uncertainty surrounding policy and mixed messages about the sustainability of economic expansion cause stock and bond market sentiment to swing strongly between pessimism and optimism.

Recent deterioration in business confidence and depressed investment is worrisome, and we remain on the lookout for broadening signs that this cautious behavior is spilling into hiring decisions and other domestic economic sectors. Should this occur, it could kick the legs out from under the recent economic expansion.

So far, the U.S. economy has held up well in the face of global headwinds. Growth has slowed, but domestic demand continues to have strong foundational support, given low levels of unemployment, solid income gains, and healthy overall household and corporate balance sheets. While volatility is inevitable, the stock market should ultimately reconnect to the broader positive fundamentals over time.

We expect stock prices to hold onto reasonable gains for 2019. A slowing but expanding economy, modest corporate profit growth, and low interest rates still provide a good environment for equity investing. We still believe maintaining a portfolio of high-quality durable assets will beat a bond or cash portfolio in the months ahead, so we want to stay highly invested in equities to earn yield and growth.

Keep these four takeaways in mind as you look ahead to 2020: 

  • The Federal Reserve

How much more easing is in store? The Fed does not plan on more interest rate cuts this year or next. However, the federal funds futures market expects one more cut this year.

  • Labor

The unemployment rate just dropped to 3.5% and is just below the previous 50-year low of 3.6%. We continue to see strong wage growth, rising labor force participation and a rebound in average workweek.

  • Inflation

Inflation momentum has been growing across a broad set of subcomponents including used car prices, apparel prices (probably due to tariffs), and airfares (which is being attributed to the shortage of aircraft following the grounding of the Boeing 737 MAX).

  • Europe

The European Central Bank (ECB) is trying to avoid a downturn. What surprised the markets the most was the aggressiveness of the ECB’s actions when it made its commitment to keep interest rates low for an open-ended period (they are currently negative, meaning that depositors have to pay interest instead of receiving interest).

We recommend developing an investment strategy based on your financial plan and on how one expects the economy and market to play out over the next 6-18 months, adjusting course if the preponderance of the data indicates that it is necessary.