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Tariffs, Rate Cuts & 2020 (with Record Market Highs), Oh My!

August 6, 2019

Happy Summer to All!

Below are a few timely comments on the state of the Investing World along with a few tips for all to keep in mind as we hit August.

As July turned to August and the last official month of Summer kicks off, we are seeing the anticipated volatility coming out of a relatively quiet few weeks in “the Market.”  The Federal Reserve recently announced a 0.25% rate cut in the Federal Funds rate, the first rate cut since 2008, and the cessation of selling Treasuries back into the market.  Twelve months ago, the idea of a single rate cut in 2019 sounded laughable and yet now, markets are pricing in 1 or maybe even 2 more cuts before the end of the year; monetary policy changes quickly.

What do we make of the recent activity?

  • First, as expected, US GDP growth has slowed, and we have probably been slowing since at least the first Quarter of this year. A large part of the tax cuts passed in December 2017 provided a lift to GDP that was expected to burn off significantly in the first part of 2019, and that is what we have seen. Having said that, GDP is still positive; the US economy is still expanding and that is typically a good sign for US equity markets.
  • Second, the US unemployment rate is still at historically low levels. We have seen months here-and-there of slowing rates of new jobs added, but the overall trend is still positive and healthy.  And despite that, we have continued to see low levels of wage growth, which, again, is more of the same.
  • Third, corporate earnings have still been generally ahead of expectations. As of this writing, we have approximately 70% of the S&P500 2nd Quarter earnings reported, and overall, we feel the numbers look good.  However, a large part of earnings growth is due to share buybacks, which can only go on for so long.  The end does not appear to be in front of us, but it is something we are watching closely.

These factors (along with many, many others) have contributed to a very positive first half of 2019 for US equities.

But why did the Fed decide to ease monetary policy when we still have not returned to “normalized” interest rates?  The answer given Wednesday in Chairman Powell’s press conference was tied to global trade concerns.  The “Trump Trade War” is causing uncertainty in global markets and as we all know: if there is one thing markets do not like, it’s uncertainty.  As a result, the Fed is taking a dovish tack to try to ease investor worries.

Counter intuitively perhaps, upon yesterday’s announcement, when the Dow Jones dropped by several hundred points, many folks threw up their hands – if the market likes easing rates, then why the selloff!?  The answer is likely because the market is looking for signals from the Fed that this won’t be the only cut this year, and even though that seems likely at this point, Powell’s remarks were not signaling a sustained period of rate cutting.  (It is worth mentioning here as well that we are also well below the Fed’s target inflation rate, and that is also somewhat responsible for the Fed’s decision.)

In our opinion, “normalized” rates are not a bad thing!  But we are looking at this (or these) cuts as a temporary period of easing amidst a return to normal.  The major concern is that if global markets continue to stall in the context of the tariffs (more just announced by President Trump on China Thursday), then the Fed easing rates may be necessary to get through this period.

That (generally) addresses US Equities – how about Internationals?

On the international scene, the hot topic continues to be Brexit. While a political and economic minefield for the Brits, from a global economic perspective, this still looks to be a tempest in a teapot.  Wild to look at up closely, but stepping back, it shouldn’t have too big an impact on the global markets (think the much-fretted-about Greek disaster from a few years back that amounted to approximately nothing on the global scale).  We still look at developed international markets as undervalued relative to US markets, with greater growth potential, and global markets are largely still easing monetary policy.  The risks are probably greater than with domestic investing at the moment, but there is longer-term potential there.

And Fixed Income?

Fixed income has been tricky the last few years and that trend will continue.  In a rising interest rate environment, longer-term duration fixed income comes with a modicum of risk.  Now that we are in a short-term rate cut period, the opposite is true.  Because of the uncertainty around this, we feel a blend of short- and long-term duration fixed income is prudent.

What are some of the biggest challenges heading into the latter stages of 2019?

We are heading into what will surely be the most toxic political cycle any of us will have experienced.  We seem to have gotten through what could have been a major issue with the Debt Ceiling debate, as that bill was approved by Congress last week and is heading to the White House for signature.  But as things heat up between the Democrats & Republicans, the political rhetoric may cause investors to get jittery.  We did not see that in 2016 (for the most part) and 2017 had historically low levels of volatility.  But since Tariffs were rolled out in mid-2018, the market has been more responsive to political headlines, especially with respect to China & Trade, and the headlines are not likely to abate any time soon!

Overall, we still like US equities, especially as they are valued relative to Fixed Income. For all the reasons listed above, we still think there is room for growth in the equity markets. Having said that, we must perpetually prepare to weather volatility and we’ve built our portfolios to do so.  Real Estate positions continue to be in many of our portfolios as a hedge, and as investors rotate back into the space with last week’s rate cut looking for yield.  International exposure has been and continues to be a (relatively) minor but important part of our portfolios to help ease against a potential US equity problem (and to capture some of the undervalued up-side when possible).  And we are managing our Fixed Income duration closely as the Fed sends signals about future action over the coming months.

Items of Note

Protective Equity Strategies: We have had this conversation with most clients, but if you think any of your family, friends, or co-workers would benefit from a portfolio analysis and/or a conversation about ways to manage risk in their investment portfolios, we welcome their calls or emails at any time.  It is always wise to take a hard look at your situation before it’s too late.  Protecting against losses is much easier than trying to make them up afterwards!  This is especially important for folks in the years immediately preceding or immediately after retirement.

Equifax & CapitalOne data breaches: Over the last few years, most everyone has received a letter or notice from your bank or credit card company informing you that they are sending you a new card because your personal data may have been breached.  This is a serious issue that is not getting any better!  Many folks had data exposed in the Equifax breach from 2017 and the terms of that settlement were released last week. We strongly encourage everyone to head to the settlement website to see if they were impacted, and if anyone has any questions about this, please feel free to give us a call! On a similar note, we would encourage everyone to consider “locking” your credit – this is done via the 3 major credit reporting agencies and ensures that no one can open a new credit card with your personal information that you otherwise would not even know about.  Locking your credit might not make sense for everyone, but it does for most folks – there is an article up on the US Advisory Group blog that speaks to this.

Over the next several months, you can expect to hear more from us about new charitable gifting strategies; tax planning strategies coming out of the 2017 Tax Bill; and a refresher on MassHealth & Medicaid planning for those of you whose parents and/or in-laws are thinking about it.  Much of this will be up on the US Advisory Group website – we encourage you all to connect on our Facebook, Twitter, and/or LinkedIn as well, as that is where we post notices of new additions to the blog!  We’ll also have reminders of US Advisory Group-hosted events as they are scheduled!

As always, we are here for any questions that come up, whether it is on your investments specifically, or any other financial-related question in your life, or in the lives of your friends & family!

We hope you all enjoy the rest of your summer!

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