The news headlines provide much for investors to worry about:
The European and Chinese economies are decelerating.
Tariffs and trade wars act economically like increased taxes by lowering returns to businesses and increasing prices to consumers, which always have a negative economic impact.
The markets hate uncertainty and the potential for a presidential impeachment certainly provides that.
The increasing federal deficit and corresponding increase in federal debt will eventually slow economic growth.
However, the strength of the U.S. economy, the resilience of corporate America and monetary easing are all positive fundamentals that have continued to move the stock market to higher levels.
The U.S. consumer accounts for approximately 70% of domestic economic growth. With unemployment at a 50 year low and rising wage gains, consumer confidence is high, and both consumer spending and savings rates are rising. In addition, the US consumer has strengthened its balance sheets significantly since the last downturn. The ratio of debt to disposable personal income is as low as it has been since the 1980s. A strong consumer belies an economic downturn.
A growing economy provides the opportunity for corporations to expand their profits as indeed they have. Despite tough comparisons to the very robust earnings growth in 2018 spurred by the cut in corporate taxes, earnings are higher thus far in 2019 and are expected to grow at a faster pace in 2020. Expectations for earnings in the third quarter were quite low, but the percentage of companies beating those expectations is the highest in many years.
Global monetary easing is increasing. China has been very aggressively easing and Europe has begun another round of quantitative easing. Of course, the Federal Reserve is also lowering rates in the U.S. The Fed has now cut the Fed Funds rate three times in 2019, each time by 0.25% or 25 basis points. There is a reason that the old adage "Don't fight the Fed" is often repeated, and that is because it is usually very good advice. The fact remains that low interest rates and easy policy are stimulative. The chart below shows how the stock market has performed when the Fed has lowered rates three times.
Market corrections can occur at any time and can be disconcerting. However, the fundamentals of a growing economy, strong corporate profits and monetary accommodation should be supportive of higher stock prices for quality companies selling for reasonable valuations.
Craig A. Vander Molen, CFA, CPWA ®
Managing Director and Chief Market Strategist
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