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Stock Market Returns and Other Happy Thoughts

Stock Market Returns and Other Happy Thoughts

| March 28, 2019

We are rapidly coming to the end of the 1st quarter for 2019.  December of 2018 is becoming a faded memory as equity and fixed income markets continue to show solid performance with trade issues and our newest best friends at the Federal Reserve providing “happy thoughts”.  Last month we took a brief look at some of the economic data that believe was driving the recent positive market returns.  This month we continue the discussion with some additional nuance for everyone to ponder.  With our best impersonation of Bob Ross (the late American painter and PBS television host), we continue to think “happy little thoughts.”

What has made us so happy?  First and foremost, with have seen an impressive move to the downside in VIX volatility, often referred to as the “worry” index.  As a reminder, the higher index, the more worry investors have about financial market conditions.  From the height of the December gloom to current “happy” levels, we have seen the VIX fall by over 50%.  From January to the end of February, the VIX dropped an impressive 36%.  During the same time frame, we witnessed the 2nd best January to February performance ever seen in global stocks.  Jobs, housing, and manufacturing are showing strength.  Inflation and unemployment are low, keeping the Federal Reserve’s rate increases on the sideline for the foreseeable future, and there is a generally positive vibe from US-China trade talks.  We believe that the White House’s more upbeat tone over US-China trade talks and the Fed’s more relaxed view toward interest rate policy are responsible for a majority of our current “happy” state.

What could take away our “happy”?  While the US has strong economic data, global growth is definitely slowing.  The Global Manufacturing index reporting it second largest decline in 21 years.  Italy is arguably in a recession, with Germany very close behind.  Brexit fears could return this summer after the British Parliament kicked the “Brexit can” several months down the road.  Also, there is no guarantee that the US and China will agree on a trade deal to prevent additional tariffs from going into effect. 

In light of all the recent uncertainties, it is not surprising that the December reading of the Global Political Uncertainty index hit an all-time high. The “GPU” index, which was created by three Economics professors from Northwestern, Stanford, and the University of Chicago, attempts to measure economic uncertainty that results from government policies, such as taxes and government spending.  It does so by tracking dissention among economic forecasters, projected tax code changes, and frequency of news articles covering economic uncertainty in major newspapers.  This index could be considered something akin to a negative headline indicator with uncertainty or disagreement as the main driver.

Since December, the US portion of the GPU index has pulled back to more normal levels, which is consistent with our discussion of “happy” developments above.  While also improving, economic uncertainty persists in the UK.  It remains very high in China, however, which we would say is due to China’s economic slowdown coupled with its unresolved trade dispute with the US, also mentioned above.  If and when these issues are resolved, we would expect the uncertainty index to fall further.

We continue to monitor the data and the disconnects, and we believe that recent policy data from the US continues to support “happy thoughts” in US markets.  We wonder, however, what Bob Ross would have said if he had painted the clouds of uncertainty that still hang over Europe and China.