THE FUTURE / QUARTERLY STOCK MARKET OUTLOOK

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TOP U.S. FINANCIAL SERVICES FIRM OFFERS 3^RD QUARTER REVIEW OF NATION’S ECONOMY WITH AN EYE TO THE FUTURE

By EdwardJones.com--Performance was mixed across asset classes in the third quarter, with domestic fixed-income returns outpacing equity returns and helping smooth out volatility for balanced portfolios. International stocks underperformed due to a slowdown in global growth amid ongoing trade uncertainty and a stronger dollar. The S&P 500 has staged an impressive rebound in 2019, with the index trading near a record high, but remember, stocks are only modestly above last year’s level, although they are also solidly supported by ongoing economic and earnings growth and lower interest rates. We expect stocks to continue to rise but at a slower pace than they have over the past three years.

Trade tensions a continual source of volatility – The pickup in volatility was catalyzed by more twists and turns on the U.S.-China trade front.

Trade tensions escalated further during the quarter before some goodwill gestures from both sides sparked optimism, easing markets. Our view remains that some form of an agreement or a compromise can and will be reached, but not soon, and that trade issues will carry into 2020.

Federal Reserve cuts rates for the first time in a decade – Citing softness in business investment and below-target inflation, U.S. policymakers have cut rates twice so far this year to sustain the economic expansion. We believe the coordinated monetary stimulus among major central banks will keep financial conditions easy, helping extend the market and economic cycle.

Recession worries overblown – An inversion of the yield curve, on top of slower global growth and unsettled trade tensions, caused recession fears to spike. Our outlook remains reasonably positive based on strength in consumer spending that ties back to the job market, resilience in the service sector of the economy and still-rising corporate profits.

We don’t see a recession materializing in the coming year, extending this already longest-ever expansion through 2020. A healthy labor market and fresh stimulus from the Federal Reserve are key pillars of support, but trade, election and geopolitical uncertainties are increasing headwinds. We think the economy will grow in the 1.5%-2% range next year.

The upside: no recession in the coming year – Our checklist of recession signals is not yet flashing red. The recent yield curve inversion is the lone warning sign, though it’s more a symptom of global rate conditions than economic exhaustion, in our view.

Elsewhere, the backbone of the expansion remains reasonably sturdy. Unemployment is at 3.7%, near a 50-year low, and monthly job growth is extending the longest streak on record, which should support better than 3% wage gains ahead. In addition, the Fed has shown a willingness to cut rates to extend the business cycle. This economic expansion is not bulletproof, but the largest share (70%) of GDP comes from household spending, so GDP growth should be sustained in the year ahead.

The downside: the pace of growth is likely to slow – Factors other than consumer spending pose headwinds that we think will restrain the pace of growth this year. We expect the growth rate to slow to 2% or slightly below as the pall of uncertainty from the U.S.-China trade turmoil and upcoming

election weigh on business investment and net exports.

We suspect the combination of impaired business confidence (stemming from the trade spat) and the lagged effects of the Fed’s rate hike campaign from 2016-2018 will be on display as we enter 2020. However, progress on trade negotiations and lower corporate and household borrowing costs make a case for sustained growth, and slow growth is still a reasonably favorable backdrop for market performance. Since 1970, when GDP rose by 1.5%-2.5%, the annual return in the S&P 500 was 4.7%.

PillartoPost.org daily online magazine uses the services of Kevin Poe, a St. Louis-based financial advisor with Edward Jones.