Market Brief: Big Picture Generally Positive Despite Market Selloff

Uncertainty regarding the trajectories of both U.S. monetary policy and U.S./China trade negotiations continue to weigh on the U.S. and global financial markets. The S&P 500 price level has retreated towards a 52-week low while volatility has advanced towards a 52-week high, and the U.S. Treasury yield curve has moved closer to inversion¹, a condition that has often been a predictor of a recession, although those recessions have typically followed the inversion by approximately two years.

Aggressive rate hikes by the U.S. Federal Reserve and/or a failure of the Trump administration to amicably resolve the trade dispute with China could serve to exacerbate a forecasted 2019 slowdown in U.S. and Global GDP growth and corporate earnings, resulting in additional downward pressure on stock prices. The good news is that this is not our ‘base case’ for 2019. While acknowledging some recent softness in the housing and auto markets, we believe the U.S. economy overall remains on solid footing. The U.S. economy continues to produce a respectable amount of new jobs, wages are rising, capital spending is growing, and consumer and business confidence levels remain at multi-year highs. Corporate earnings are quite strong as well, and although we do anticipate a deceleration in growth, current Wall Street consensus estimates call for approximately 10% S&P 500 earnings growth in 2019. Importantly, inflation pressures remain relatively benign, which may limit the need for aggressive Fed rate hikes.

Although we believe the economy will avoid a recession in 2019, we recognize that the current economic business cycle is likely closer to the end than the beginning or middle. This viewpoint, combined with expectations for slowing corporate earnings, higher levels of market volatility, and a now more attractive interest rate environment, results in our having a more cautious outlook for equities. Importantly, with a S&P 500 price/earnings ratio of approximately 15-16 times 2019 earnings estimates, we view stocks as reasonably valued especially within the context of the current low inflationary environment.

As always, we encourage you to contact your Washington Trust Wealth Management portfolio manager should you have any questions or concerns regarding your portfolio or financial market conditions.

1-Yield curve inversion refers to a condition in the U.S. Treasury market in which yields on short-term maturities are higher than those on long-term maturities.