On the Radar is a biweekly publication providing quick and concise answers to the topical investment and economic questions that are on investors' minds.
New questions in this issue:
What is CNR's outlook for equities?
Optimism has returned to equity markets with U.S. stocks rallying back to near record highs on the Fed's continuing policy pivot, as well as better news regarding the U.S.-China trade dispute. This is typical of late cycle investing where gains are harder fought as uncertainty surrounding policy, and mixed messages about the expansion's sustainability, cause market sentiment to swing strongly. We still have enough confidence in the economic outlook, and see sufficient scope for earnings improvement, to remain positive on the long running bull market.
Is the consumer still a dominant part of economic growth?
Personal consumption, which makes up about 70% of GDP, continues to be the driving force of economic growth. In Q2, it grew at 4.7% and in Q3, looks like it will grow around 3.0%, well ahead of the 2.3% growth rate of the overall economy for the past year. The robust growth is attributed to the near record low unemployment rate, solid wage gains and ample access to credit. This strength is helping to offset weakness arising from trade policy uncertainty (exports, investment, etc.) and should keep overall GDP growth around 2.0% this quarter.
What did we learn from the Fed meeting?
The Federal Reserve Bank lowered the federal funds rate by 25 basis points to the median level of 1.875%. Interestingly, there was a level of discontent. Seven of the voting members approved the move and three dissented. Of the three objectors, one wanted to cut rates by 50 bps and two members wanted to keep interest rates unchanged. As for their outlook, both voting and non-voting members of the FOMC make their projections. The median is for no change in interest rates for the remainder of the year, yet seven of the 17 members want another cut to interest rates before year end.
Are equity valuations a concern?
Equity valuations, although still reasonable in the context of today's low interest rates, are beginning to look high from a historical perspective and do require close attention. High valuations are associated with lower long-term returns and provide a higher perch from which to fall in the next downturn.
What is causing interest rates to fall so much?
Ever since the early 1980s, interest rates have been falling. At the time, the 10-year treasury note hit a peak yield of 15.8%. The primary force that has pushed yields down since then has been lower and lower inflation. Back in the early 1980s, the consumer price index hit a peak of 14.8%. Now it is 1.7%.
What is City National Rochdale's investment outlook?
Given our continued positive assessment of the fundamental backdrop, we remain positive on equities in general and continue to see attractive prospects in the opportunistic fixed income class.
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