The U.S. Stock Market in 2019
The U.S. stock market has been on a tear so far in 2019 with broad indices up over 15%, achieving its best performance for the first half of any year since 1987. In any other year, the typical investor would be overjoyed with double-digit returns, yet for some reason, this bull rally does not feel satisfying. Perhaps, it is because of ongoing trade negotiations with China; the looming tensions between the U.S. and Venezuela, Iran, and North Korea; the increasing likelihood of a “hard” Brexit; lingering concerns from 2018’s market declines; or the dread of an inverted yield curve that has been weighing on everyone’s minds. Whatever the reason, the market has run full speed ahead only to come to a sudden halt after a policymaker’s announcement or a resurfaced geopolitical risk, and then has risen again a few days or weeks later to new highs.
The Current Bull Market
With so much focus on what is going wrong, few headlines are highlighting what is working. Earlier this year, the current bull market surpassed ten years, marking one of the best decades for equity investors in a century. In part, this is due to the robust economy, demonstrated by an unemployment rate under 4 percent, a 50-year low, and solid consumer confidence. Healthy labor markets foster a strong consumer who is willing to spend, which in turn leads to businesses that are willing to invest in the future. Meanwhile, federal, state, and local governments are pushing for more spending, including a $2 trillion infrastructure package and additional military investment.
Underpinning this chain is the Federal Reserve, which has made it easy for the whole financial system to borrow money for new purchases and investments. The Fed has backed off the tightening it began last year and shows a much greater inclination to loosen monetary policy. Fed Chairman Jay Powell has offered markets new hope, stating that the Fed will set policy to meet its mandates of full employment and price stability. If the committee becomes more accommodative, the economy and markets will likely continue their upward trajectory.
Nonetheless, the market is likely to experience more red and yellow lights flashing in the upcoming months. Going into the year, investors had anticipated resolution on Brexit and expected clarity on trade negotiations with China by mid-year. Now that those deadlines have been extended, the market faces more uncertainty and will need to process new information as it surfaces. U.S. conflict with other nations has escalated, fueling anxiety over oil prices and pressurizing an already tense geopolitical system. Corporate earnings have been lackluster following a year of outsized returns due in part to the prior year’s tax stimulus. Finally, the upcoming presidential campaign is likely to catch some companies flat-footed as they navigate proposed legislation or adapt to a potentially different political environment.
Wrapping It Up
Such uncertainty explains why investors are tepid about their prospects for the second half of the year. In the near term, there are many reasons to be cautious, yet over the long term, we are optimistic about what the future holds. For example, for the reasons we lay out in our next article, “What Drives GDP Growth?,” the U.S. is in an envious spot. Between favorable demographics and being at the center of meaningful innovation, the economy will likely continue growing and companies will benefit from these tailwinds. The most important thing for investors is to stay invested and participate in this growth—and not to overact to the yellow and red lights as they surface.
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