Slowing Economic Growth or Just Facing Another Quarter 1 Quirk?
The Good and Not So Good
First of all, Sonders notes, while US stocks remain fairly resilient, even in the face of slowing economic growth and rising fears of a recession, volatility in the markets could re-emerge.
Take this month as an example. March saw an early rally followed by the worst week for US stocks so far this year. This was due to economic and earnings growth concerns both nationally and globally, as well as growing recession fears.
The caveat is that the first quarter of each year historically tends to be slower than the rest of the year. Not to mention that this year's first quarter had some unique, if temporary, influencing factors, including a government shut down and unusually frigid weather, the report points out.
On the service and labor fronts it's a little bit positive, and also not. Schwab's report says service index indicates future growth with housing's rebound from a December drop an encouraging sign.
Critically, however, the labor market continues to be tight, with the Labor Department reporting only 20,000 non-farm payroll jobs added in February. And while the consumer looks fairly healthy, business optimism remains subdued. A resolution to trade disputes with China is needed, according to Sonders.
Inflation is a mild risk, not helped by more job openings being available than workers right now. Small companies are seeing the cost of labor as their single biggest problem and that, combined with other possible inflation triggers, including a downturn in the velocity of money, mean it's something to keep a close eye on, according to the report.
Having said that, Sonders does not think inflation in the US will run away, due to continued deflationary pressures globally. She also notes that in Europe the recession is not as deep as in 2011-13. A slowdown rather than full-blown recession.
Sonders and her team do foresee a global recession on the horizon. In the US they do not predict one in the near future but believe "trade policy remains a key factor in the span between now and the next recession." At CAIM, we believe this will add to market volatility. The Fed did a nice job of raising rates last year so there is the ability to manage any economic slow down by lowering rates.
Schwab, like CAIM, advises steadiness as an essential requirement to long-term investor success in the face of ongoing market ups and downs. Investors should "remain at or near their longer term US and global equity allocations, remain diversified, and use volatility for rebalancing opportunities."
As we say at CAIM, invest for the long term, buy quality companies.