Weekly Market Commentary – August 5, 2019

Major news buffeted the market last week. The Federal Reserve cut rates as expected, but the press conference and vote margin suggested the cut does not signal more to come, which disappointed investors. Additional tariffs on Chinese goods were announced by President Trump, and the U.S. employment market remained strong.

Key Points for the Week

  • The Federal Reserve cut rates as expected, but the Fed’s outlook concerned investors who desired deeper cuts.
  • President Trump announced additional tariffs on Chinese exports.
  • The U.S. economy created 164,000 new jobs last month.
  • Stocks dropped as the market remained concerned about slowing economic growth.

On balance, markets reacted negatively to the news. The S&P 500 fell every day last week and slid 3.1%. The MSCI ACWI dropped 3.1%, too. Bonds rallied on the news as concerns about slower growth benefited high-quality bonds. The Bloomberg BarCap Aggregate Bond Index rose 1%.

Even with the weakness, the S&P 500 rose 1.4% in July. The global MSCI ACWI rose 0.3%, and bonds increased 0.2%.

PCE graph 

A Little Indigestion

Last week contained the equivalent of a seven-course meal of market-moving data. The Federal Reserve met, U.S. employment information was released, the president announced further tariffs, and a host of other data points were released. In a week rich with news, investors struggled to digest it well.

The Federal Reserve started the process by lowering rates 0.25% as expected and announced the ending of its balance-sheet reduction. This ends a long streak of interest-rate hikes and moves the Federal Reserve into easing mode as seen in the accompanying chart. The chart also shows inflation remaining well below the Fed’s stated 2% target.

But Chair Jerome Powell’s press conference, as well as the 8-2 vote to cut rates, caused investors to worry the Fed wouldn’t cut rates as much as it had expected. The Federal Reserve is a consensus-driven organization, in contrast to the Supreme Court where narrow majorities are more frequent. Two votes against cutting rates signaled less support than expected. Powell reinforced this view during the press conference by calling it a mid-cycle adjustment and not the start of a long, rate-cutting cycle.

Investors are becoming more concerned the ongoing trade dispute with China will slow economic growth enough to push the global economy into a recession. Fears of continued slowing were fanned by weak manufacturing data from around the world. If the weak data weren’t enough, President Trump surprised markets by announcing a 10% tariff on the remaining $300 billion in Chinese imports not included in previous tariffs.

In spite of the uncertainty, U.S. employment continues to be strong. The economy produced 164,000 jobs last month, and wages continued to increase at solid pace.

Investors struggled with the combination of the news. Investors were disappointed by the Fed and concerned that trade disputes are sapping scarce economic vitality.

For long-term investors, it serves as a reminder that key market participants’ actions won’t always benefit our portfolios in the short term. Sometimes participants make mistakes, and sometimes investors have horizons that are too short. This week was a good reminder not to overindulge in short-term policy adjustments, manage our expectations, and focus on the things we can control.

Fun Story

What Sort of Ticket Do You Get for This?

A driver likely had an interesting discussion with authorities when his stalled vehicle took up the left turn lane and some of the middle lane at an intersection in Washington last week. Fortunately, the driver and officer were able to manually move the vehicle to one side. It isn’t all that surprising until you consider the stalled vehicle was a single-propeller airplane that was forced to land on a city street due to a fuel system malfunction. By coming to a complete stop at the intersection, at least the pilot avoided any tickets for running a red light.

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