Environment remains supportive of stock prices

Investors in 2018 witnessed the first down year for the S&P 500 since the market crash of 2008 and entered 2019 believing that the downward slide that began in the fourth quarter would continue. Nothing could have been further from the truth as stocks, as they often do, climbed this wall of worry in fine fashion rising more than 17.35% during the first half. And rather than donning our “Captain Hindsight” suits, let us take a look forward to present what we believe is strong evidence as to why this bull run will continue well into the third quarter. We’ll begin with the factor that we believe is the most influential.

This past week, Federal Reserve Chairman Jerome Powell testified before the Senate Banking Committee where in what we believe is the most extraordinary statement made by an economist thus far this year, challenged the current validity of the Phillips Curve. This equation addresses the inverse relationship that exists between interest rates and employment. That is to say, as employment declines interest rates rise and vice versa and has been the bedrock of Fed monetary policy for more than forty years. In fact, in 1977 Congress amended the Federal Reserve Act of the 1920s, directing the central bank to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates,” commonly known as the Fed’s Dual Mandate. Over the past several years many have questioned the validity of this equation and during his testimony before the Senate Banking Committee this past week, so did Federal Reserve Chairman Jerome Powell who stated that “the relationship between the slack in the economy or unemployment and inflation was a strong one 50 years ago, if you remember in the 60’s there was a close correlation there and that has gone away.”

In what no doubt is a nod toward lower interest rates Chair Powell stated that “in addition to that, I think we are learning that interest rates, that the neutral interest rate, is lower than we had thought and the natural rate of unemployment is lower than we thought so monetary policy hasn’t been as accommodative as we had thought.” This could result in lower interest rates for longer which is supportive for stock prices.

We also will believe that the strong labor market will continue to support stock prices. Nationally, there are currently more jobs available than there are people looking for them. This will promote strong consumer confidence as well as consumer spending.

Negotiations between the United States and our major trading partners, specifically China will move forward at an acceptable pace and when this is not perceived as so, members of the Trump Administration will appear on our networks suggesting that there is progress being made. This is supportive for the financial markets.

Two final items that we think will be supportive include the fact that President Trump assumingly wants to be reelected and needs a strong economy to do so. Regarding the Democratic challenger, the rhetoric has yet to heat up and although increased rhetoric is a potential headwind to the market in Q4 and into 2020, this has yet to become a front burner item.

Despite the above please remember that historically the financial markets can be risky and volatile over the short-term but neither risky nor volatile over the long-term which we would define as five years or longer.

Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.