The US economy grew at a rate of 2.1 percent in Q3’2019, weaker than the 3.0 percent recorded in Q3’2018, and lower than the expected growth for 2019 at 2.6 percent according to the International Monetary Fund (IMF).
The performance was driven by gains in the labor market, which picked up towards the end of the year. Also, trade tensions between the US and China cooled down as the UK elections cleared the uncertainty around the Brexit. The economy held-up well considering the economic slowdown is being experienced worldwide.
Business investment was low during the year as a result of the global slowdown in manufacturing activity and the trade dispute with China.
The labor market has remained strong, with Non-Farm Payroll (NFP) increasing by 266,000 in November 2019. This has seen the unemployment rate fell to a 49-year low of 3.6 percent.
The Federal Open Monetary Committee, for the first half of the year, maintained the Federal Funds Rate at a range of 2.25 – 2.50 percent and slashed the same in the July meeting to 2.00 – 2.25 percent in the September meeting to 1.75 – 2.00 percent and in the December meeting to the current range of 1.50 – 1.75 percent. This was in an effort to spur spending amid the global economic uncertainty experienced throughout the year.
Compared to 2018, wherein the beginning of the year the range started at 1.25 – 1.50 percent and ended the year at 2.25 – 2.50 percent there has been an easing in monetary policy evidenced by the lowering of the Federal Funds Rate.
This move was driven by:
Weakened business investment and international trade amid falling manufacturing as a result of slower global growth and trade policy tensions
Muted inflationary pressure with the November inflation rate of 1.8%, being below the government’s target of 2.0 percent
The stock market registered gains, with the S&P 500 gaining by 29.8 percent in 2019, which is the best performance since 2013.
The performance was mainly supported by a surge in technology stocks and the renewed hope from the phase-one trade deal between the US and China, which is set to be signed early 2020.
In terms of valuations, the Cyclically Adjusted Price/Earnings (CAPE) ratio is currently at 30.0x, 78.6 percent above the historical average of 16.8x, indicating the market remains overvalued relative to historical levels.
Source: Cytonn Investments Report.