The US stock market finished the third quarter near its all-time highs, which is remarkable given the volatility witnessed during the 90-day period. The media has been touting a recession resulting from the combination of the trade war and restrictive Fed monetary policy. Most economic indicators are pointing to slower growth, so the Fed has reversed course and is now adding new monetary stimulus intended to avert a recession.
In the meantime, nearly two-thirds of Euro Zone government debt is trading at negative interest rates due to very sluggish growth and government reluctance to increase deficit spending to stimulate their economies. With growth prospects so dismal, investors have chosen to buy government debt regardless of the income return. Investors are telling Germany and others they will buy their debt at any price so please issue more to satisfy our demand. The European Central Bank is adding more stimulus, but unlike the US this effort may finally be “pushing on a string” without substantial fiscal stimulus as well. Germany is the largest economy in Europe, but it is unwilling to embark on expansionary fiscal policy (e.g. tax cuts and deregulation) and as Germany goes, so goes the rest of Europe.
Back to US stocks, the six-year chart below illustrates how stock prices resemble a staircase. 2013-2014 were strong years for the market that were followed by two years of sideways, or consolidating, price moves. The market then began another strong two-year period of gains in 2016-2017. This January will mark the two-year anniversary of the current sideways move, unless the market breaks out to new highs during the fourth quarter.
Of course, the market can also fall if a big news event is deemed to be negative for the economy such as more attacks on oil facilities in the Middle East or continued fireworks in Washington. We’ll know more later!
-George Farra