Wall Street, Main Street, and the street where you live

Photo of a man and a woman unboxing their house after moving.

Well, the 1st quarter of 2019 sure felt like an improvement. The stock market surged in the opening months, after ending 2018 with a dismal drop. Fears of an impending recession began to fade. And the U.S. housing market, weak toward the end of 2018, started to perk back up. And through it all, consumers and a solid labor market continued to power the U.S. economy forward.

Wall Street rallies.

After a December drop that would’ve made skydiving enthusiasts put their hands over their eyes, markets rebounded strongly in early 2019. This rebound was partly driven by a change in policy from the Federal Reserve (Fed), the central bank of the United States. The Fed sets the level of interest rates, which could affect how much you pay for everything from car loans to credit cards and home mortgages.

Toward the end of 2018, investors were worried that the Fed was going to keep raising interest rates, making credit more expensive and economic growth more difficult. Then, during their January meeting, the Fed decided not to raise rates again. That news seemed to be just what Wall Street (the financial markets) wanted to hear, sparking an early rally in equities.

What about Main Street?

Wall Street rebounded in early 2019, but what about Main Street, otherwise known as the U.S. economy and the businesses that comprise it? Bob Baur, chief global economist for Principal Global Investors, remains positive. “U.S. economic growth may be a bit slower in 2019, but it’s still very healthy,” Baur says.

In fact, Baur points out that if the U.S. economy can continue growing through July 2019, it will be the longest U.S. economic expansion in history.

This is important because a growing economy can help create new jobs, push people’s paychecks higher, and provide more opportunities for businesses.

“Even with a perplexing drop in February, the U.S. labor market still shows remarkable resiliency,” Baur says. With low unemployment and more people eager to join the workforce, wages have been growing, so workers take home more pay. What’s even better for U.S. workers is that inflation—the general rise in the price of goods and services—is low.

“Modest inflation pressure means faster wage growth will likely bring higher real incomes, and workers can buy more with their money,” Baur says.

 

low inflation

faster wage growth

higher real incomes

 

It’s that dynamic between wage growth and inflation that indicate consumer spending could stay near 3% this year, continuing to help boost the U.S. economy.

There’s no place like home.

One particularly American economic indicator is the housing market, where home ownership has long been synonymous with the American Dream. When the housing market is doing well, homeowners tend to feel more optimistic and wealthier because the value of their home is increasing. If they feel wealthier, they’re more likely to spend money, which helps move the economy along.

“Housing hit a rough patch in 2018,” Baur says, “but I anticipate that to improve in 2019.”

He points to lower mortgage rates as a positive factor. “If mortgage rates stay low, potential buyers can afford more house.”

Homebuilding companies are also more positive, as confidence of homebuilders is improving after 3-year lows. That’s a good sign: Optimistic homebuilders are generally more comfortable taking the financial risk to build new houses.

“As the U.S. heads into the summer homebuying season, we’re seeing more building permits and mortgage applications, which means there’s good appetite among U.S. consumers,” Baur says.

What can you do?

Check back in with your retirement account.

If the market turbulence at the end of 2018 had you twisted in knots, see if the rally helped you recover. Log in and look at your investment statement to see the change between December and March.

Are there houses in your portfolio?

How do houses show up in investment portfolios? Through a type of fixed income investment called mortgage-backed securities (MBS). These investment options pool together a bunch of home mortgages and pay investors from the monthly mortgage payments. Look at your investment statement, in the fixed income portion, to see if you have any exposure to the U.S. housing markets through investments that include mortgage-backed securities.

Spring clean your portfolio.

As markets move up and down, as they have over the last 6 months, your balance between stocks, bonds, and other investments can move, too. It might be a good time to check your allocations to see if you need to rebalance your portfolio to stay on track with your long-term financial goals. Look at your latest statement to see if the mix of investments matches up with your investing plan and risk. If not, you could move some money around to get back in balance.

 

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Investing involves risk, including possible loss of principal. Asset allocation and diversification do not ensure a profit or protect against a loss.

Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options.

Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline.

Real Estate investment options are subject to investment and liquidity risk and other risks inherent in real estate such as those associated with general and local economic conditions. Property values can decline due to environmental and other reasons. In addition, fluctuation in interest rates can negatively impact the performance of real estate investment options.

The commentary represents the opinions of Principal Global Investors. It should not be considered investment advice. No forecast based on the opinions expressed can be guaranteed and may be subject to change without notice.  No investment strategy, such as diversification, can guarantee profit or protect against loss.

Insurance products and plan administrative services provided through Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC and/or independent broker-dealers. Principal Life, and Principal Securities are members of the Principal Financial Group®, Des Moines, Iowa 50392. Principal Global Investors leads global asset management and is a member of the Principal Financial Group®.