2019 was a party for stock investors. Most equity asset classes broke double digits with many exceeding 20% gains for the year. HCM equity portfolios fully participated in the fun. But, don’t let the calendar year spotlight fool you.
Of all the one-line investment mantras investors have followed over the years, none would have made you more money than the little ditty in the title. As I have described it to clients before, the Fed is essentially an organization with unlimited funds to influence markets and doesn’t care if they make money. Their expressed purpose is to strategically inject liquidity into the financial system with the hopes of facilitating economic growth. Another term to describe this activity is “Quantitative Easing” (QE). Since the Great Financial Crisis, there have been 3 “official” rounds of QE and a slight variation termed Operation Twist. Most would consider these programs a success, but not necessarily for their stated goals of accelerating economic growth. The stock market has been the biggest winner since the first round of QE was introduced in December 2008. During that same time, both GDP growth and inflation have held steady near 2%. This gap in growth rates has led many analysts to the conclusion that QE is the ultimate stock market steroid.
Some of you may be familiar with the work of M.C. Escher and his ability to make stairs do seemingly impossible things. One of his most popular pieces, Relativity, depicts three distinct staircases forming a triangle. However, this triangular formation runs into trouble towards the top of the work, as the staircase seems to bend the laws of gravity and forces the brain to do a little extra work in processing what exactly is going on. I would encourage you to take a look for yourself.
With economic growth slowing around the world, the air in the balloon may be starting to cool down a bit. Going back to last year, most everyone believed the air going into the balloon was red hot and that economic growth was going to keep rising. Fast forward 12 months and we are starting to see more signs that challenges to economic growth, and our steady supply of hot air, are growing.
The Federal Reserve cut interest rates for the second time this year. The move marks only the second time since 2008 that rates have been cut. While this move was in line with the consensus, it re-iterates concerns that slowing economic growth and the ongoing tariff war with China could eventually bring on a recession. Many see the Fed’s latest move as “insurance” to help prevent the economy from slipping into recession. And, while we don’t see the data points that typically precede recession, we also don’t see anything that would suggest growth is about to pick back up. We may be in a “goldilocks” environment where growth rates as neither too low nor too high. This potential is supported by the fact that a non-recessionary environment paired with a second rate cut has typically been a pretty healthy environment for stocks.
The Federal Reserve is set to meet next week and is widely expected to cut short-term interest rates. While opinions vary on how much they will cut, most analysts expect .25%, with the outliers being as high as .50% or as low as 0%. These meetings will likely affect markets for the foreseeable future.