10-15 Associates

Here We Go Again

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July was not short on news flow.

In addition to the beginning of second quarter earnings, markets were tuned into the Fed for any hint of what it might do at the end of the month, economic data including second quarter GDP gave investors more information on the health of the economy, and the appointment of Boris Johnson to Prime Minister of the United Kingdom brought questions about the future of Brexit. In addition, commodities markets saw action in everything, from oil to gold, and volatility spiked in the cryptocurrency markets as well. Interest rates were on the move due in part to the announcement in Europe that the Central Bank would continue to support negative interest rates and the expectation that our Federal Reserve would cut rates for the first time in a decade.

The attack on big technology by Washington continued as Facebook once again found itself needing to apologize for a security problem with their site (even as they announced plans to launch a new currency). Amazon set new records with their version of “Christmas in July,” selling an estimated 175 million items on Prime day. With over 100 million paying customers on the Prime subscription platform, it was the most successful shopping event in Amazon history.

Markets were on edge waiting for the crush of earnings that were released during July. By the end of the month, 71% of the companies in the S&P 500 had reported and 77% had beat the estimates. On the face, those numbers are impressive, however, expectations had been lowered going into the numbers.

Given that consumers represent nearly two thirds of GDP, it will be difficult to maintain current levels if the consumer continues to be more cautious.

The economic data overall remains mixed, supporting the concern from the Federal Reserve that the economy is slowing. GDP slowed to 2.1% from the first quarter’s 3.1% but was slightly better than the 2% that was expected. Inside the GDP report, it was a tale of two different economies. Consumer spending, which represents approximately two thirds of overall spending, increased 4.3%, which would be in line with the strength we saw in consumer confidence numbers. The index of consumer confidence rose in July to the highest level seen this year, suggesting that Americans remain confident about the U.S. economy despite persistent trade tensions and slowing global growth. Several metrics, including the outlook on business conditions, job availability, and income growth, all improved from the levels reported in June. The consumer is essential to the health of the overall economy. PNC Chief economist, Gus Faucher, summed it up well: “Consumer spending won’t continue to grow at a 4% pace, but solid job growth and rising wages will allow households to increase their spending through the rest of the year and into 2020.”

Faucher may very well be right, and spending may increase due to job growth and rising wages, but business spending and investment have declined by 5.5%, the worst since the fourth quarter in 2015. Business sentiment, which has been driven much more by the worries over the back-and-forth battle over tariffs between the U.S. and China, and the resulting spillover of slower growth around the world, has caused many to hesitate when it comes to spending in corporate America. One source of concern in addition to China has been Europe. In addition to the changing political environment and uncertainty surrounding Brexit, the eurozone economy slowed sharply in the second quarter. Data released by the Eurostat, the statistical office of the European Union, showed that the eurozone GDP grew at a rate of just .8% in the second quarter compared to 1.8% in the first quarter. The decline has been led by manufacturing, most notably in Germany and Italy, countries which the eurozone economies are most dependent on. The weakness immediately led to discussions about Central Bank intervention with stimulus in September. The European Central Bank President, Mario Draghi, recently said that the economic outlook for the area was becoming “worse and worse.” This, in addition to the victory of Boris Johnson to succeed Theresa May as UK prime minister, intensifies the uncertainties of the entire region. The risk of an exit from the EU without a plan under the leadership of Johnson has become a reality that could lead to further economic destabilization.

Given some of the global concerns, it came as no surprise that Federal Reserve Chairman, Jerome Powell, cut interest rates by .25% at the end of the month. Although highly anticipated, the move is also highly controversial. It is the Fed’s belief that it is necessary to keep the expansion going in order to reach those in most need of help, low income households. “I can’t remember a Fed chair who was as emphatic about the benefits of this high-pressure labor market to people who have long been left behind,” said Jared Bernstein from the Center on Budget and Policy Priorities. However, there are risks, as critics point out the possibility that inflation may end up not being as tame as the Fed believes. In an article in Barron’s, CIO of Guggenheim Partners, Scott Minerd, points out that Chairman Powell has been clear that he will go for broke doing whatever is necessary to keep the expansion going. However, the result is that rate cuts could lead to unsustainably high asset prices and increased financial instability. According to Minerd, “this can only make the next downturn worse. The Fed’s cure for avoiding a near term recession and negative interest rate may ultimately make the disease worse.” The politics of the move are also in question as the President has been more than vocal about his desire for the Fed to cut rates.

With all this going on, little attention was given to the vote by the House to pass a bill to suspend the debt ceiling and set spending levels for two years. With approval by the Senate, it now only requires the signature of the President. The agreement suspends the debt limit through July 2021 and sets top line levels for defense and non-defense spending for the next two fiscal years. Although represented as a win for both parties, with the projection of annual budget deficits will top $1 trillion in the coming years, it’s hard to believe there are any long-term winners.

Despite all that was thrown at the markets and a final day of the month selloff, all three major indices closed higher on the month. The Nasdaq led the way with a 2.11% gain, followed by the S&P 500 at 1.31%, and the Dow coming in at up .99% on the month. Interest rates actually finished slightly higher due to diminishing expectations of more rate cuts to come. As we move into August, a traditionally low volume month, it is likely the headlines will continue to keep investors on their toes.for relaxing more than usual!

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