All Clear?
For most of the month of July, the financial markets continued its ascent higher, with the S&P500 logging in gains over 2% through the first three weeks of the month. As the market paused to digest the ongoing rally in the final week of the month, we observed a little bit of selling pressure, which is not a huge surprise given the S&P was up over 20% YTD and continuing to make new all-time highs. A little selling pressure at this juncture is healthy, and such consolidation is necessary to extend gains in the months ahead.
On the final trading day of the month, the Federal Reserve held its policy meeting to decide if whether to raise, hold, or decrease the Fed funds rates. The Fed has been doing a good job of broadcasting its thoughts on their rate policy for some time, and this meeting was no exception. It was widely expected that the Fed would reduce the Fed Funds rate by .25%, which was pretty much already priced into the market.
The thoughts on reducing rates by .25% was based on the belief that the Fed may have tightened a little too much in 2018, and wanted to take a small step back as “insurance” that the economy would continue to strengthen and sustain the current economic expansion cycle. But market participants wanted the Fed to suggest that more rate cuts may be made in the future. Since the Fed did not commit to additional rate cuts, the stock market was left a little confused and a 1% sell off occurred on 7/31, closing out the month with a .5% gain for July. The Bond market was up .1% for the month.
We believe the Fed is being cautious in its decision to cut rates and are not overly concerned about the ongoing health of the U.S. economy, which continues to be the strongest of the developed global markets. However, the economic challenges in Europe and Asia, and the ongoing trade negotiations with China, can have an indirect impact on the U.S. economy. This, we believe, is why the Fed decided to tap the brakes on normalizing rates, and not due to observed weakness in the U.S. economy itself.
To be sure, corporate earnings announced for 2Q2019 so far have widely come in better than expected, implying that corporate profits continue to expand, even in the face of weakness overseas. This is a positive indicator of the health of the U.S. economy, and, to us, suggests risk asset exposure should be maintained – not reduced. We continue to stay at our target equity allocation, and are pleased with the gains we’ve achieved so far this year. Bonds have also been productive in 2019, so we’re all benefiting from risk appropriate exposure to both broad asset classes, and will continue to maintain our positions as we move forward.
As we enter the August “dog days of summer” which are typically accompanied by lower volume, we do not anticipate any big moves in the financial markets, but will continue to monitor your portfolios on a regular basis. For now, we should all take a deep breath and be comforted by the fact that corporate earnings continue to be a positive attribute of a healthy U.S. economy, and will maintain our U.S.-centric exposure to risk assets.
We will report again after August. Feel free to contact us if you have any questions and enjoy the remaining weeks of summer.
Contact us with anytime. We welcome questions and feedback.
Because the information on this blog are based on my personal opinions and experience, it should not be considered professional financial investment advice. No financial decisions should be made based off this article without consulting with your financial advisor first.
