With the stock market again sitting at a new high, we are looking for a pause to digest the recent positive rhetoric of a trade deal and another expected rate cut this week from the Fed. The run-up in the last three weeks has been impressive, in particular the rotation out of defensive names and into beaten down cyclicals and value stocks. We do not expect this rotation to continue for much longer and have been adjusting our portfolio accordingly. The U.S. economy is projected to grow close to 2% in Q3 due mostly to consumer strength, with industrial production acting as a drag given trade uncertainty and the global slowdown. Industrial and cyclical earnings should be lackluster at best in Q3, taking most of the steam out of this recent rally. We continue to favor a barbell strategy of high growth names and dividend paying stocks. The yield curve has temporarily reinverted again but we believe the overriding trend for rates is still downward. It remains to be seen what the impact on rates and the overall economy will be from the oil price spike following the attack on a key Saudi oil facility. Early estimates have global crude production off approximately 5% with most coming back online within the next six weeks. The key will be whether Iran gets implicated in the attacks and what the joint US and Saudi reaction looks like. War with Iran could boost oil above $100 a barrel again which could be the straw that breaks the US consumer’s back.
Predicting the end of this great economic run we have been on for more than ten years continues to be an obsession of both the Street and the average investor. The strains are clear but the inherent strength and momentum of the U.S. consumer is hard to disrupt. Globally, things are less sanguine, with China showing significant economic deceleration. Recent Chinese industrial production numbers were at 17-year lows and GDP is poised to dip below 6% for the first time in 20 years. A similar deceleration is happening in Europe and Japan. The reaction from central banks and governments has been to open up the liquidity spigots, so we still think the chances of a recession in 2020 are remote. As mentioned, an external shock such as $100 crude could change that outlook.
Please let me know if you have any questions via phone at 804-774-2087 or email at Jesse.Ellington@middleburgfinancial.com.
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