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By Brent Puff - July 16, 2019
US stocks posted their best first half of a year in more than two decades. Yet as our investment team looks out over the rest of 2019 and into 2020, we believe it will be more difficult for markets to continue making big moves higher.
Growth around the world is under pressure in both developed and developing economies. This more modest pace of global economic activity is in turn slowing the pace of corporate profits. Moreover, the trade dispute between the US and China remains unresolved and is likely to continue to pressure business confidence, investment and ultimately future global economic activity.
Although the shift to greater monetary policy accommodation by the US Federal Reserve and other leading central banks around the world should help counter some of the headwinds derived from slower global growth, we believe the growth environment will remain challenging, particularly if the trade dispute persists.
In my latest video, I outline the issues in more detail and share our approach in this more challenging environment.
If you just look at conditions in most major geographies in developed markets and within emerging markets, the trends are generally softer. It is a more challenging backdrop, for sure.
One of the positives in the first half of '19 has been the recovery in equity markets after the sharp sell-off in the fourth quarter. The extent to which markets have recovered from a pretty protracted sell-off has clearly been a positive. In terms of challenges, I think the big challenge is equity markets continue to wrestle with is the reality of slower economic activity around the world and a slower pace of corporate profits.
Economic activity was slowing down before the tariff war sort of escalated. But there's no question that the escalation and trade tension between the United States and China is something that will further pressure go-forward growth rates.
From a high level, increased tariffs serve as effectively a tax on both corporate profits and consumers. And there're some ancillary impacts that are hard to measure exactly. But it's pretty clear that if you're operating a business today, and your business is being impacted by tariffs, making investment decisions, making hiring decisions are all impacted by the uncertainty created by the trade war. And I think that's an important impact, which is in the process of playing out.
With that said, in the environment we're in, which is one in which global economic activity is slowing and corporate profits—in general—are slowing down, our team is focused on trying to identify businesses where the growth drivers within those businesses are relatively idiosyncratic and insulated from the overall slowdown in growth.
Parts of the market have gotten a little bit rich, particularly parts of the market that are perceived to be higher quality, more durable relative to other parts of the market. Some of the strength we're seeing in certain parts of the market is being driven by expectations that the U.S. Federal Reserve is going to begin to unwind interest rates going forward.
What is crystal clear today is that economic activity around the world is under a bit of pressure, probably more pressure than the Federal Reserve expected when they were hiking rates late last year. And I think that gives them “ammunition” to reduce rates going forward to try to preserve what has been a long and durable economic cycle.
In thinking about the second half of 2019 heading into 2020, I think the one thing we can say with a high degree of certainty is there is more uncertainty going forward. Growth is slowing down. The corporate profit cycle continues to lose steam, and the trade impacts of the trade war are still somewhat uncertain.
And I think in an environment like that, it's going to be really important to be a bottom-up company-specific oriented investor because the overall backdrop for companies is clearly going to be more challenging than it has been.
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