Simply Money - November 2019 Market Update


Andy Stout

Allworth’s Chief Investment Officer, CFA®, CFP®

Sitting around my grandmother’s dinner table celebrating Thanksgiving is one of my fondest memories growing up. I can still remember the smell of turkey wafting through the air, the sounds of my family’s nonstop chatter, and, of course, the sight of all those delicious homemade pies (pumpkin was always my favorite).

This was also a time that our family used to prepare for the upcoming holiday season. So, as Thanksgiving approaches, I want to remind you that now is a good time to make sure you’re also prepared – but in a different way: financially. And not just for the next few days, but for the next few years.

Stock and bond markets have had an excellent year (so far), and the economy has enjoyed its longest period of growth ever. That’s certainly something to be thankful for. However, if history is any guide, stock and bond market volatility will eventually pick back up and the economy will one day slip into a recession.

While we’re not predicting a recession in the next six to nine months, we believe now is as good of a time as any to make sure your investment portfolio is aligned with the risk you are willing and able to take. 

If you’re not taking enough risk (i.e., having too much in fixed income relative to equities), you could end up making an emotional decision and buying certain securities just because they have been rallying. Chasing returns is a risky strategy that could result in you buying at the exact wrong time – the top.

Conversely, if you’re taking too much risk, you may end up selling out of your investments at the exact wrong time – the bottom.

If your investment mix is not where it should be, you could end up making a decision that results in a permanent loss of your money, and that’s the real risk you face. The right investment mix is one where you can live with the market ups and downs and still be in a good position to enjoy your retirement.

Considering the strong market you’ve enjoyed this year, now is the perfect time to make sure you have the proper mix of equities and fixed income. With your personalized financial plan as a guide, your financial advisor can help make sure you’re on the right track to enjoying retirement.

And, even if you’re already on the right track, understanding the economy can still be beneficial. How? You're less likely to make emotional decisions that could ruin your retirement when market turbulence returns. 

Today, the economy is on solid footing, but growth – as measured by a change in GDP (gross domestic product) – has been slowing all year. The past three quarters have seen growth slow from 3.1% to 2.0% to 1.9%. The 1.9% growth rate in the third quarter of 2019 can be primarily attributed to spending from consumers like you. There are four main components of GDP: consumer spending, government spending, private investment (which includes business spending), and net exports (exports minus imports). 

Without consumer spending, our economy would have had zero growth in the third quarter and negative growth in the second quarter. What’s kept consumer spending alive and well has been a robust job market, which can be seen in the near 50-year low unemployment rate of 3.6%. As long as businesses don’t start mass layoffs, consumer spending should be able to keep the economy going.

Many people wonder why the U.S. economy isn’t regularly growing at 3% like it used to. There are many reasons for this, including changing demographics and a lack of business spending. Business confidence has taken a hit due to the uncertainty around the trade war, and this may have caused businesses to pull back on their spending. If we get some clarity on the trade war, such as the signing of a partial trade deal, some economists speculate that businesses might increase their spending. 

We’re skeptical that a partial trade deal will be enough to incentivize businesses to increase their spending by a material amount. We believe that as long as recession risk remains low, economic growth around 2% will be the most likely outcome.

There have been many people worried that the U.S. economy will slip into a recession. This fear has come about because of the trade war, Brexit, and slowing global growth. Fortunately, trade tensions have lessened over the past few weeks, as both the U.S. and Chinese government appear to be moving to sign an agreement for a partial deal. Also, the chances of the UK crashing out of the Eurozone without a deal of its own have greatly diminished. 

These reduced risks have helped lift long-term government bond yields. These yields are directly related to one of the indicators that have had many people worried about a recession – an inverted yield curve. This occurs when short-term government bond interest rates are higher than long-term government bond interest rates. When this has happened in the past, recessions have often followed about 17 months later, making this one of the more reliable leading indicators (leading indicators are data points that move before the broad economy moves).

Now that longer-term government bond yields have risen, the yield curve is no longer inverted. Specifically, interest rates on the 10-year Treasury bond are higher than interest rates on both the 2-year Treasury bond and the 3-month Treasury bond.

We are not about to say all is clear on the economic front, but recession risk has fallen. We’ll continue to monitor the yield curve, as the possible effects from the earlier inversion bear watching. With that said, we analyze many more leading indicators than just the yield curve, and none of the other major leading indicators have signaled a slowdown.

So, at this year’s Thanksgiving celebration, when you’re going for a second plate of all the fixings, I want you to take a moment to think about your investment mix. Remember, you’re planning for your retirement, and you don’t want to be making emotional decisions. Instead, make informed decisions based on the data and your financial plan.

All data from Bloomberg. The Allworth Recession Index is made up of leading economic indicators, which are data points that have historically moved before the economy. The index value is calculated as a percent of the indicators that are sending signals that suggests recession risk is elevated. When the index value is greater than 40%, we believe there is a greater chance for a recession in the next six to nine months. All data begins by 1971 unless noted below. The indicators that make up the Allworth Recession Index are the 3-Month Government Bond Yield, 2-Year Government Bond Yield (beginning in 1976), 10-year Government Bond Yield, BarCap US Corp HY YTW – 10 Year Spread (beginning in 1987), Conference Board Consumer Confidence, Consumer Price Index, NFIB Small Business Job Openings Hard to Fill (beginning in 1976), Private Housing Authorized by Building Permits by Type, US Federal Funds Effective Rate, US Initial Jobless Claims, US New Privately Owned Housing Units Started by Structure, and US Unemployment Rates. 

Past performance does not guarantee future results. Any stock market transaction can result in either profit or loss. Additionally, the commentary should also be viewed in the context of the broad market and general economic conditions prevailing during the periods covered by the provided information. Market and economic conditions could change in the future, producing materially different returns. Investment strategies may be subject to various types of risk of loss including, but not limited to, market risk, credit risk, interest rate risk, inflation risk, currency risk and political risk. 

This commentary has been prepared solely for informational purposes, and is not an offer to buy or sell, or a solicitation of an offer to buy or sell, any security or instrument or to participate in any particular trading strategy or an offer of investment advisory services. Investment advisory and management services are offered only pursuant to a written Investment Advisory Agreement, which investors are urged to read and consider carefully in determining whether such agreement is suitable for their individual needs and circumstances.

Allworth Financial and its affiliates and its employees may have positions in and may affect transactions in securities and instruments mentioned in these profiles and reports. Some of the investments discussed or recommended may be unsuitable for certain investors depending on their specific investment objectives and financial position. 

Allworth Financial is an SEC-registered investment advisor that provides advisory services for discretionary individually managed accounts. To request a copy of Allworth Financial’s current Form ADV Part 2, please call our Compliance department at 916-482-2196 or via email at compliance@allworthfinancial.com. 

November 15, 2019

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