For the third time of this expansion, growth expectations have fallen again, and the 10-year Treasury has dropped below 1.5%. The question is whether this is just slowdown #3 and we should be expecting something similar to the rebound that we saw in 2013 and 2016, or is this one different?
Given the maturity of the cycle, we are watching for signs that the breadth of this decline expands, which would put in jeopardy the strong labor market and with it consumer confidence. For perspective, the current 3.5% unemployment rate is at a 50-year low, and since 1969, The Conference Board’s Consumer Confidence Index only eclipsed today’s level during the late ‘90’s boom. There are two data points that concern us and are worth highlighting. The Conference Board’s CEO Confidence report that was published on October 2nd showed a dramatic drop, falling to its lowest level since the first quarter of 2009. Additionally, while most of the current softness in the economy has been concentrated in the manufacturing side of our economy, the employment component of the ISM’s Non-Manufacturing report for September has fallen rather quickly to 50.4, or just above the 50 mark that denotes expansion from contraction. The pace of job growth in the US has already decelerated, but remains positive according to the most recent ADP jobs report. The 4-month average addition to private payrolls is down to 135,000, but this is below the 200,000 average monthly pace from 2011 to 2018.
Market sentiment (and CEO confidence to a degree) bounces around with the news, and the headlines during the quarter were eventful to say the least. In September the Federal Reserve cut rates for the second time and said that they likely need to expand their balance sheet. Chicago Federal Reserve Chief Evans recently said that the Fed remains in risk management mode as they reverse their tightening actions of previous years. We have also been following the escalating protests in Hong Kong. Their leader, Carrie Lam, withdrew the extradition bill that initially triggered the protests, but the demonstrators have only intensified their efforts. The protests have occasionally drifted into the public discussions between the US and China and it is not lost on anyone that this is occurring just as the Chinese Communist Party prepares their grand celebration of 70 years in power. In late September, House Speaker Pelosi also announced the formal impeachment inquiry into President Trump. A week earlier there was the attack on the Saudi oil facilities, which put in jeopardy 5% of the global supply. Oil prices jumped more than 15% when markets opened on September 16th. Top it off with the nationwide strike at GM and you have a recipe for low confidence. Let’s hope the US consumer does not notice.
Read the full Q3 2019 Large Cap Value Equity Review: