The two dominate market forces as of late - the Federal Reserve and China - continued to control the market in July. The S&P 500 continued its upward trajectory with the S&P 500 gaining 1.31% as of the close on July31. The broad U.S. large-cap index managed to break through the psychological 3,000 mark and closed at a new record high of 3,025.86 on July 26. The rally was mostly attributed to modestly positive corporate earnings reports and the market anticipating the Federal Reserve’s interest rate cut. Now, in a matter of only a few days, short-term sentiment has turned negative with the intensification of the U.S. and China trade war. (1)
Tensions were re-ignited on July 31 when U.S. trade negotiators departed China without a trade deal and little progress made. The next day on August 1, President Trump announced he would impose additional 10% tariffs effective September 1 for the remaining Chinese exports which are currently exempt. In addition, the President threatened to go even further stating he could increase tariffs “well beyond 25%.” The tensions have now continued into the first full week of August, with President Trump alleging that China has manipulated its currency to almost a historic low. (2)
Interest Rate Cut
Anticipation was high all last month with the expectation that the Federal Reserve would offer a boost to the market in the way of an interest rate cut. The central bank did not disappoint and delivered its first rate cut in more than a decade. Typically, interest rate cuts occur when the business cycle is slowing. This led many to question why the Fed would implement such a move when economic data remains fundamentally strong. Speaking to the media, Fed Chairman Jerome Powell characterized the cut as a “mid-cycle adjustment.” Given the timing of the rate cut on July 31 and President Trump’s new tariff announcement on August 1, many speculated whether correlation was more than mere coincidence. (3)
Suffice to say, the China trade escalation will more than likely dominate the markets and news headlines this month with short to mid-term volatility continuing. Many are speculating that the Chinese government will likely be reluctant to any deal until after next year’s presidential elections. This would force President Trump to justify the market fluctuations while on the campaign trail, in addition to China potentially being able to negotiate a trade deal with a new President in 2021.
On the positive side of things, the latest hiring and consumer spending reports from the federal government suggested an economy in good shape. Employers expanded their payrolls with 224,000 new jobs in June and the Federal Reserve came through with a rate cut. However, some other cross winds included a decline in Q2 Gross Domestic Product (GDP), waning real estate growth, and signs of economic weakening in Europe. (4,5,6)
Given the conflicting aforementioned data and the increasing likelihood that the trade war may be a prolonged dispute, we have to keep our minds open to all potential outcomes in the short and long-term. We are actively monitoring market conditions and implementing portfolio allocation adjustments where we deem necessary to align with the long-term objectives of all our clients.
Monthly Financial Tip:
You may be inclined to help your adult children financially during your retirement, but think twice about doing so. Providing gifts or a personal loan (or cosigning on a loan they arrange) may put your own financial outlook at risk.
1 - cbsnews.com/news/stock-market-today-record-s-p-3000-as-u-s-stocks-rise-on-interest-rate-optimism/ [7/12/19]
2 - foxbusiness.com/economy/us-china-trade-war-timeline-latest-stock-reaction
3 - cnbc.com/2019/07/31/fed-cuts-rates-by-a-quarter-point.html [7/31/19]
4 - investing.com/economic-calendar [7/31/19]
5 - reuters.com/article/us-usa-economy/moderate-u-s-consumer-spending-inflation-back-fed-rate-cut-idUSKCN1UP1FD [7/30/19]
6 - cnbc.com/2019/07/26/us-gdp-second-quarter-2019.html [7/26/19]
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.