For this week’s Market Commentary, I am including the opening excerpt from the 4Q edition of The Farr View. If you would like to read the entire newsletter, please click on the link below.
In the third-quarter edition of The Farr View, as in many editions prior, we focused a lot of attention on the many different challenges that investors would face as this economic cycle grows long-in-the-tooth. We said that fleeting tax-cut benefits, rising interest rates, high debt levels, and slowing growth outside the US were among that factors that would cause a deceleration in economic growth from the strong levels in the second and third quarters. We also speculated that the Fed may be committing a policy mistake by hiking interest rates too far and too fast. Our long-held opinion was then, and remains, that the economy cannot withstand significantly higher interest rates.
Well, there is a bit more of the same in our message this time. High debt levels and ill-timed fiscal stimulus continue to leave us vulnerable in the event of a significant economic slowdown. The U.S. is also not making the long-term investments necessary to drive labor productivity, boost middle-class incomes, and reduce economic inequality. These chronic issues will keep our economic optimism grounded well into the future.
That said, we are also seeing some hopeful signs for equity investors following the 20% peak-to-trough correction we endured during the fourth quarter. Whereas we continue to see plenty of policy risk, we are also becoming more sanguine about the possibility of successfully resolving some of those issues. We are most encouraged by the latest signaling from the Fed, which suggests a pause in policy normalization, and progress on trade talks with China.
Our overriding message, then, is that the trends we experienced in the fourth quarter, including the correction in stock prices, a moderation in earnings expectations, and a reduction in investor complacency, have created opportunities that have been elusive for much of the past several years. We believe these opportunities should be a welcome development for long-term investors.