Market Update: August 6, 2019
Market Update: August 6, 2019

Market Update: August 6, 2019

 

By:

William M. Giffin
William M. Giffin
Chief Executive Officer
Chairs Leadership & Investment Teams

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Kevin Rice
Kevin Rice
Investment Analyst
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Market Update: August 6, 2019

TC on the Markets

In our most recent market commentary, “Back and Forth: Where Do We Look Next?”, we mentioned how watching the market is like watching a tennis match. We look one way at the Federal Reserve (Fed), and then the other way at the U.S.-China trade talks. Then back at the Fed, and again back at the U.S.-China trade talks. Over the past couple of days our heads have been spinning between last week’s rate cut from the Federal Reserve, a resurgence in trade tensions between the U.S. and China and an increase in market volatility. We thought it would be helpful to provide an update on each one.

Trade Wars

  • Last Thursday the market saw an escalation of trade tensions when the U.S. announced a 10% tariff on $300 billion worth of Chinese goods, starting in September. The new tariffs are likely to impact the prices of consumer goods more directly than the 25% tariffs on $250 billion in Chinese imports already in effect. The new tariffs reignited concerns that the world’s two largest economies are still far apart in resolving lingering trade disputes.
  • In response to the U.S. tariff threat, China retaliated yesterday by allowing its currency to depreciate past the important psychological 7.00 Chinese renminbi per U.S. dollar level (the first time in a decade). They also halted any purchases of agricultural products and announced their intention to tariff any shipments currently on the way.
  • After the markets closed on Monday, China fixed the yuan at 7.00 Chinese renminbi per dollar. But it came hours after the U.S. had designated the country a currency “manipulator,” a move that could open the door to new penalties on top of the tariff hikes already imposed on Chinese goods. Markets rebounded on Tuesday after China moved to stabilize its currency fueling speculation that a full-blown trade war would be avoided.
  • Point of View
    • Both sides are expected to continue trade talks next month, but as we mentioned in our most recent Market Commentary, we don’t believe these trade disputes are going away anytime soon. Because of this uncertainty and the power of a presidential tweet, we expect trade negotiations to continue to impact market volatility.

Federal Reserve

  • As we had predicted, last Wednesday the Federal Reserve moved with a quarter-point cut to the policy rate, the first rate cut in a decade. The Fed’s assessment of the U.S. economy did not change, with officials acknowledging strength in the labor market, a pickup in consumer spending, and a moderately growing economy.
  • In a press conference after the rate announcement the Fed chairman indicated that future rate cuts were unlikely this year. He characterized the move as a “mid-cycle adjustment” as opposed to the “beginning of a long series of rate cuts”, but also indicated the Fed was not necessarily done. The markets took his comments as a mildly hawkish cut. Stocks recorded their worst week of the year with the S&P 500 falling by -3.1%, the Dow Jones by -2.6% and the yield on the 10-year Treasury fell to 1.84%, its lowest level since 2016.
  • Point of View
    • Recent data shows that economic fundamentals, though slowing, are still a positive underpinning the bull market. We believe that the Fed’s recent rate cut should help boost business confidence and allow the economic expansion to continue. When looking at the history of rate cuts since 1970, the markets have responded favorably to a cut when the economy was expanding. The S&P 500 has increased 9% on average in the first six months, and then increased by 14% one year after the Fed cut rates. Only during the recession years of 2001 and 2008 was a rate cut not followed by an increase in stock prices over the subsequent months.
    • Due to the recent tariff increases we believe that the Fed is likely to cut rates again in September. As of this morning the Fed Funds futures had a 100% probability that there was going to be another rate cut in September.
Exhibit 1

Market Volatility

  • Yesterday the S&P 500 declined 2.98%, to close at 2,845. The Dow Jones Industrial Average declined 2.89%, more than 750 points, and the NASDAQ Composite shed 3.5%.
  • Over the last 6 trading days the Volatility Index (VIX) has more than doubled. The VIX is a real-time market index that represents the market’s expectations for volatility over the coming 30 days.
  • Point of View
    • To put Monday’s movement of the Dow into historical context, the decline was not that significant in the history of the Dow because it was the 390th largest 1-day decline in percentage terms. As we mentioned in our most recent commentary, we expect volatility to return to higher levels in the second half of the year and it has done just that.
    • The 2.98% decline of the S&P 500 yesterday was the fourth 2% move of the year (up or down). On average we would expect to see ten moves a year which would indicate an increase in volatility in the coming months.
Exhibit 1

Asset Allocation Outlook

We currently do not see a need to shift our portfolio allocations. We feel that they are positioned properly with higher allocations to U.S. equities and core fixed income/municipal bonds that should provide principal protection. The market’s reaction and sentiment to these trade talks move too fast to consider any changes to portfolios and we believe we are already well positioned to weather current market volatility. Please reach out to your Wealth Advisor if you have any questions or concerns.

 

Tags:  Asset Allocation, August 2019, Federal Reserve, Market Update, Market Volatility, Outlook, TC on the Markets, Trade Wars

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