Summer 2019 Investment Outlook
Bob Landaas: Kyle, we’re now in the longest economic expansion in U.S. history. Unemployment is the lowest in 50 years. Stocks reflect that, though. The market has been on a run this year so far. What are your thoughts moving forward?
Kyle Tetting: Bob, certainly plenty to celebrate this year, but I think, as you start to look at the markets, you start to look at stocks, you start to see an environment where things are becoming a little bit overvalued. So, while I’m encouraged by the returns we’ve had, I do think that things may be getting a little bit past fair value here.
Bob: Seems that we’ve got consumers that are free to spend money with wages going up, but now manufacturing seems to be slowing down, not only in the United States but overseas, at the same time that business confidence and business investment is slowing.
Kyle: Yes, and as you look at the employment picture, things still look pretty good, but when you look at much of the rest of the economy, you’re starting to see some signs of weakness. And so, I think potentially you’ve got some things to worry about coming up.
Bob: Kyle, as you know, more than likely, the Federal Reserve Board’s going to be lowering interest rates on Wednesday of this week. First time in over 10 years that that’s occurring.
Kyle: Yes, and I think a big deal for stocks as well is the age-old adage of don’t fight the Fed comes into play here. And as you see that discount mechanism start to come down, hopefully it’s a little bit of a boost for stocks, even as we’ve seen that valuation piece now become a little bit overvalued.
Bob: I was surprised to see in the Fed minutes from last month that they expect the economy to now reaccelerate the year after next with the prospects of potentially needing to raise rates at that point of time. First time I’ve seem a mention of them raising rates after so much time has been spent on predicting the Fed lowering rates now for the first time in 10 years.
Kyle: And such a critically important point, Bob, to look not just at what we expect over the next six months or a year but looking a little bit past that. As we all know, the market is a forward-looking indicator. It looks ahead to what it sees, and so, while the potential for a bit of a slowdown is certainly there, it’s encouraging to see that the Fed is looking beyond that to see what might be causing an acceleration later on, as you say, into 2021.
Bob: So, interest rates and earnings. I get the concept of lower interest rates helping stocks as a discount mechanism. It gives us higher valuations for stocks, but let’s talk about earnings here. They’ve been pretty weak. This quarter, the last quarter, not supposed to do much in the third quarter until we see a hopeful acceleration in the fourth quarter.
Kyle: Some of what’s led to the valuation issues we have in stocks right now is just the absence of earnings growth, as you mentioned that. Really, we’re going to go through a period of about two or three quarters where that earnings growth has stagnated. And again, I think as we talk about the forward-looking mechanism that is the stock market, the hope is that we really do realize some of the expectation for earnings growth in the quarters ahead.
Bob: You and I get this question asked constantly these days, how long is the party going to last? When is the party going to be over? When should I start taking defensive moves? We’ve been talking quite a bit lately about potentially moving more money over to the value side. It tends to hold up better in downturns, pays nice dividends, and perhaps the glory days of some of the growth stocks coming at least to a stall or a pause because of antitrust issues in Washington, because of privacy issues with some of the tech companies and now with a pretty good slowdown in China, where they get a lot of their sales.
Kyle: And I think there’s a benefit to value now that maybe didn’t exist in the past, in that it’s more diverse than it’s ever been. That you’ve got a lot of companies now that show up on the value side of the ledger, that maybe in the past have been more traditional high-growth companies. So, you don’t just have to buy defensive or traditionally defensive businesses. You can buy some defensible businesses, those business that are really going to be around for a while. And so it really sets up nicely to maybe tone down risk in your portfolio a little bit, without really giving up all the upside that’s out there.
Bob: You know, and we’ve been focusing for a while now on trying to get better downside protection when the odds start increasing for the next downturn. It’s not a matter of if. It’s just a matter of when. It’s pretty hard to predict because they tend to be crises of confidence, that just the very definition of such is hard to predict. But I think it’s appropriate to look at the value stocks that tend to hold up a lot better than the growth stocks in a market decline. So you don’t necessarily need to reduce your overall stock exposure as much as you need to move from growth to value. Have you seen much of that with some of the portfolios that you monitor with the funds?
Kyle: Certainly so far in 2019, we’ve seen some flows into value compared to growth, some especially performance advantages in certain areas of value relative to growth. And so, I think we can continue to lean into some of that with the expectation that you can experience a little bit less volatility, as we need in markets where we expect things to get a little bit more bumpy and at the same time participate in the upside of stocks long-term.
Bob: So two issues that you read time and time again that suggest that the market might be in for a period of below-average performance: An aging population here in the United States, and lack of productivity growth. We clearly can’t do anything about an aging population. Maybe the silver lining here is a potential increase for productivity growth moving forward.
Kyle: Absolutely, Bob. I think you look at the technology initiative—how big of a piece technology has become of our overall economy. That should be the saving grace. That should be the piece that continues to drive economic growth even, as you mention, as the population ages, even as you look at kind of what the long-term effect is. It could be technology that really takes us to that next step.
Bob: And we’ve been talking on the podcast now for several months about anecdotal evidence that suggests that productivity is, in fact, climbing, that companies are being forced into the technology because they can’t find help. So they’re embracing robotics, artificial intelligence. They give them the ability to increase the output per man-hour worked without actually hiring more people.
Kyle: And ultimately, we have a little bit of a slowdown right now. We’ve talked about it, and yet, as you look at that next step, as you look at what drives the future, hopefully it’s those kinds of things.
Bob: Thank you, Kyle.
Bob Landaas is chairman and chief executive officer of Landaas & Company.
Kyle Tetting is director of research and an investment advisor at Landaas & Company.
Money Talk Video by Peter May and Jason Scuglik
What slowing growth means for investors, a Money Talk Video with Bob Landaas and Kyle Tetting
Fed’s about-face, interest rates, earnings, a Money Talk Video with Bob Landaas and Marc Amateis
Ignore bonds at your own risk, a Money Talk Video with Kyle Tetting
Retaining value in your stock portfolio, a Money Talk Video with Marc Amateis
Interest rate matters for investors, a Money Talk Video with Brian Kilb
(initially posted August 1, 2019)
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