This is part of an ongoing series of articles published by Johnson Financial Group. This issue is written by Brian Andrew, EVP Wealth and Chief Investment Officer.
In recent events in Madison and the Fox Valley, Johnson Financial Group Chief Investment Officer Brian Andrew shared an economic update and market outlook. Now more than ever, he advised investors to keep short‐term news about trade and politics in perspective and stay focused on investment fundamentals.
“It is important to stay the course though a volatile market. Whether it is short‐term news about trade or the election, it causes investors to take their eyes off of investment fundamentals,” said Andrew. For example, when a politician proposes changes to healthcare on the campaign trail, investors shouldn't overreact by selling health care stocks. The industry is more likely to benefit from the Baby Boom generation entering its high health care spending years than be hurt by a proposed government policy that may take years to enact. Instead, investors should use market news to find attractive buying opportunities.
Andrew considers both the structure of the market—such as trends that can take years or even decades to play out — as well as shorter term market cycles that can play out over just a few months or quarters. Some of the important structural factors he is watching include:
News of an inverted yield curve (short‐term interest rates higher than longer‐term rates) and reports of a slowdown in the manufacturing sector have many worried about a recession. Andrew does not expect a recession in the near term. “Manufacturing is only 15% of the economy. The consumer, which represents nearly 70% of the economy, continues to be healthy.”
Andrew also pointed to what he believes to be the “best of both worlds” for businesses — low unemployment combined with low wage growth. Andrew keeps a close eye on wage growth and prefers this number stays below 3%. “Higher wage growth makes it harder for companies to manage costs and avoid raising prices.”
The consumer is also facing what he considers a “goldilocks” economy. “Consumers are benefiting from low unemployment combined with low interest rates. We continue to expect slow but positive growth.”
As an exporter, China has significantly more goods that are subject to tariffs than the U.S. Tariffs have already impacted China which is experiencing slower growth; China has moved to improve its economy by lowering taxes and interest rates. “So far China has faced a greater impact, but they have ways to stimulate growth. But if the U.S. consumer starts to see tariffs on electronics, it could change the calculus.”
Politics will continue to dominate the headlines into 2020, and Andrew cautioned investors to keep the political environment in perspective. He sited a recent study from Cornerstone that tracked people's perception of the economy based on political affiliation. Seventy‐nine percent of Republicans polled felt the economy was good while only 33% of Democrats felt the same. “We are all living in the same world with 2% economic growth and 3.5% unemployment, and yet we all have completely different views of what this means.”
Continued easy monetary policy from the Federal Reserve will continue to benefit stocks and bonds. Global growth is slowing and there is increased geopolitical risk, and Andrew believes China does matter.
“Stocks are expensive now and have gotten ahead of fundamentals. We anticipate a mid‐ to late‐cycle slow down, but we expect economic growth to continue to be positive.”
“Investors should keep the political climate in perspective.”
This information is for educational and illustrative purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation, an offer to buy or a recommendation for any security. Opinions expressed herein are as of the date of this report and do not necessarily represent the views of Johnson Financial Group and/or its affiliates. Johnson Financial Group and/or its affiliates may issue reports or have opinions that are inconsistent with this report. Johnson Financial Group and/or its affiliates do not warrant the accuracy or completeness of information contained herein. Such information is subject to change without notice and is not intended to influence your investment decisions. Johnson Financial Group and/or its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Certain investments, like real estate, equity investments and fixed income securities, carry a certain degree of risk and may not be suitable for all investors. An investor could lose all or a substantial amount of his or her investment. Johnson Financial Group is the parent company of Johnson Bank, Johnson Wealth Inc. and Johnson Insurance Services LLC. NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE