July was a big month for a lot of socio-economic news: Deutsche Bank laying off 20,000 workers; Iran took a United Kingdom oil tanker; the U.S. jobs report was weaker than expected. And so the Fed came out with its “dovish language” and an action plan to cut rates. However, even after the Fed cut rates for the first time in over a decade, investors cried for more. During Fed Chairman Powell’s press conference, he stated that the action of the Fed (to cut rates by 25 basis points, or a quarter of one percent) was not necessarily to start an easing cycle; rather this action was an effort to “sustain the expansion.” When investors heard Powell’s remarks that there may not be additional cuts, the reaction was negative and the markets swung from positive to down for the last day of July. To quote the “Artist Formerly Known As Prince: ‘this is what it sounds like, when dove’s cry.’”
As Powell stated, the economy has been steadily moving along the Fed’s desired levels with the Gross Domestic Product in line at 2% and unemployment is just under 4%. Consumers continue to spend-- a driving force of the United States’ economy--but inflation remains below the desired level of 2%. Businesses tend to disagree with Powell’s opinion of the economy and believe that trade policies as well as the current state of the global economy will negatively impact the health of the United States’ economy.
President Trump’s action overshadowed Powell’s with his recent decision to implement a tariff on Chinese goods. This was a complete reversal of what had been decided in June by Trump and China (that they would continue to have discussions and agree not to impose additional penalties on one another). But, the start to the third quarter saw improvement in returns in almost all asset classes, with Large Caps continuing to outpace all other assets by at least 250 basis (or 2.5% when one compares the Russell 1000 as a proxy for Large Caps and the Russell 2000 as a proxy for Small Caps). However, these actions, combined with concern that the slowing global economy is more tied to politically influenced activities, is something could hurt returns in the third quarter and rest of 2019.
While returns in June recovered the losses of May and allowed returns to hit a high for the year, July continued the rally right up to the end of the month. However, this first week of August has experienced an increase in volatility and concern as the geo-political environment embarks fears of a recession over the next twelve to eighteen months unless China and the United States reach a resolution.
At LHT Consultants, we rarely believe that giving blanket advice is in the best interest of those who read our comments. However, when one sees Large Cap Stocks up close to 20% in seven months (and more if you are invested in Large Cap Growth), it is best to remember how volatility in the fourth quarter of 2018 erased most gains for last year. Our recommendation is that investors speak with their advisors in order to better understand the importance of asset allocation as well as one’s tolerance for risk. With ten plus years of economic expansion, it would benefit investors to look at their current exposure and decide what is a balance of risk and potential returns that could make them comfortable. The event in August seems to be more politically driven than economic, but that does not make the impact any less. So, speak with an advisor who can help you navigate the current and future situations. Because, if things do get worse, you might hear crying from more than just doves!
Be sure to consult your financial advisor with any questions regarding the markets and investments. For more information about LHT Consultants as well as to receive more updates on the markets, please visit us at www.lhtconsultants.com.