Mid-Year 2019 Perspective
Trade turmoil and the Fed Rate cut leads to what the markets despise, “Uncertainty”!
As I write this, the equity markets are in the midst of the biggest stock market sell-off of 2019. The Dow Jones Industrial Average is currently down 855 points as of 2:42 PM today (August 5, 2019 source: QUODD Financial Information Services, Inc.).
Last week, the equity markets also declined, responding to President Trump’s tweet that he intended to raise tariffs on an additional $300 billion worth of Chinese imports beginning next month. China has been quick to respond by suspending purchases of agricultural products from the US, and today, allowed its currency (the Yuan) to fall to its lowest level against the dollar in more than a decade. The rising trade tensions have sent global stocks reeling and bond prices soaring, sending interest rate yields to their lowest levels of the year.
We wrote last month that given how strong the markets have performed since the start of 2019, equities were priced for perfection and therefore, it was only of matter time that something would trigger a reversal. Now, with the uncertainty of how the escalating trade tensions will play out, plus, the confusion of what last weeks Fed decision means for the remainder of the year, we believe that a temporary correction is upon us. Please note that market corrections are a normal and healthy trading activity. The worse thing for an investor to do in this type of market environment is to act on impulse and emotion. If you have a diversified, long-term investment strategy, don’t abandon it and stay the course. The most important thing to do is to make sure that your investment strategy is in sync with your objective, liquidity needs, and risk tolerance. Time is your friend! In other words, don’t have assets that you may need soon, invested in a strategy that is aggressive and volatile. Define your objectives and know what you own and why you own it. We’re here to help.
On a positive note, we believe that this is a short term trading event that will pass. Economic fundamentals will eventually rule the day and the US economy is incredibly resilient and remains on very solid ground. It is our view that the U.S. economy is capable of mid-2% growth in the year ahead which can still provide a favorable environment for the equity and credit markets. Inflation remains low, consumer spending is solid, and with the labor market close to full employment, wages continue to move higher. We do not see a recession in the foreseeable future and, in the event that an amicable trade agreement is reached, we believe sentiment will likely improve.
Of course, we will monitor activity and data closely and we will adjust our investment models if necessary. As always, we will look for opportunities that very often present themselves during events such as this. Stay tuned!
Second Quarter Review
The second quarter was full of ups and downs for stocks as investors had plenty to worry about. Throughout the quarter, the trade war between the United States and China ebbed and flowed as news continuously changed from positive to negative. Employment was steady and the unemployment rate remained low, but wage growth was moderate at best. Manufacturing and industrial production hit a snag during the second quarter, as did business fixed investment.
To start the quarter, the markets reacted positively in April to the encouraging rhetoric that a trade deal could possibly be reached between the United States and China. Unfortunately, that was quickly replaced in early May with the imposition of new tariffs on U.S. imports from China. Retaliatory tariffs on U.S. exports entering China soon followed. The Nasdaq and Russell 2000 fell almost 8.0% in May, while the S&P 500, Dow, and Global Dow each dropped by more than 6.5%. Money moved from stocks to bonds, driving bond prices higher and yields lower. The yield on 10-year Treasuries sank 37 basis points to close May at 2.13%. Crude oil prices, which had exceeded $60 per barrel in April, plummeted by almost $10 per barrel by the end of May.
Stocks rebounded during the middle of June and soared by the end of the month. The tech-heavy Nasdaq led the monthly gains, reaching almost 7.5%, followed by the Dow, which also gained over 7.0% for the month. The Fed’s decision to hold interest rates helped drive investors to stocks. Still, investors sought long-term bonds, driving prices higher and yields lower.
Ultimately, stocks posted solid gains by the end of the second quarter. Each of the benchmark indexes listed below closed the quarter with gains, although not close to the double-digit returns earned at the end of the first quarter. The large caps of the S&P 500 led the way at the end of the second quarter, gaining 3.79%, followed closely by the tech stocks of the Nasdaq, the Dow, the Global Dow, and the small caps of the Russell 2000, which eked out a quarterly gain of 1.74%. By the close of trading on June 28, the price of crude oil (WTI) was $58.16 per barrel, up from the May 31 price of $53.33 per barrel. The national average retail regular gasoline price was $2.654 per gallon on June 24, down from the May 27 selling price of $2.822 and $0.179 lower than a year ago. The price of gold soared by the end of June, rising to $1,413.30 by close of business on the 28th, up from $1,310.30 at the end of May.
The world and the investment landscape has changed dramatically over the past 10 years. As a result, we believe it is very important for investors to adjust their investment strategies accordingly. What was smart 10 years ago may not necessarily be so smart today! For example, if you have fixed income bond investments, you need to understand how rising interest rates may affect your portfolio. As far as equity investments, we are now in the late stages of a long economic cycle and we anticipate volatility to continue. It is important for investors to understand what they own and align their investment strategy with their current financial situation and specific needs.
At PWA, we can help you with a complimentary Risk Analysis Review. We use sophisticated portfolio analytics to run stress tests on portfolio allocations. We can then provide you with a report on how a portfolio may perform in different economic and market scenarios. The more informed you are about how your investments are positioned, the more you can relax, sleep well, and enjoy the things you love most.
Contact us at 800-499-4143 extension 3 or send an email to [email protected] with any questions you may have.
Trade turmoil and the Fed Rate cut leads to what the markets despise most, uncertainty!
Total employment increased by 224,000 in June after adding only 72,000 (revised) new jobs in May. The average monthly job gains so far in 2019 is 172,000 per month (223,000 in 2018). Notable employment increases for June occurred in professional and business services (51,000), health care (35,000), and transportation and warehousing (24,000). The unemployment rate inched up by 0.1 percentage point to 3.7% in June. The number of unemployed persons increased slightly to 6.0 million in June (5.9 million in May). The labor participation rate was 62.9% and the employment-population ratio was 60.6% in June. The average workweek was unchanged at 34.4 hours for June. Average hourly earnings increased by $0.06 to $27.90. Over the last 12 months ended in June, average hourly earnings have risen 3.1%.
FOMC / interest rates
As expected, the Federal Open Market Committee lowered interest rates by 25 basis points following its latest meeting in July. Lack of price inflation and slowing global economic growth underscored the Committee’s decision to reduce the target range for the federal funds rate to 2.00%-2.25%. The vote to reduce rates was 8-2, with dissenting members opting to leave rates unchanged.
GDP / budget
Economic growth appears to have slowed in the second quarter, according to the initial, or “advance,” estimate of the gross domestic product. The second quarter grew at an annualized rate of 2.1%. The first quarter saw an annualized growth of 3.1%. Consumer prices and spending increased in the second quarter, rising 2.3% and 4.3%, respectively. Pulling the GDP down in the second quarter were negative contributions from fixed business investment (equipment, software, structures, etc.) and exports. The federal budget deficit was only $8.5 billion in June ($74.9 billion in June 2018). Through the first nine months of the fiscal year, the government deficit sits at $747.1 billion. Over the same period for fiscal year 2018, the deficit was $607.1 billion.
Inflation / Consumer Spending
Inflationary pressures remain weak as consumer prices rose 0.1% in June and are up 1.4% over the last 12 months ended in June. Consumer prices excluding food and energy increased 0.2% in June and 1.4% since June 2018. In June, consumer spending rose 0.3% (0.5% in May). Personal income and disposable (after-tax) personal income climbed 0.4% in June, respectively.
The Consumer Price Index increased 0.1% in June, the same increase as in May after rising 0.3% in April and 0.4% in March. Over the 12 months ended in June, the CPI rose 1.6%. Energy prices held overall consumer prices in check, falling 2.3% in June. Prices less food and energy rose 0.3% in June — the largest monthly increase since January 2018. Core prices (less food and energy) are up 2.1% over the last 12 months. In contrast, over the same period, the energy index has fallen 3.4%.
According to the Producer Price Index, the prices companies received for goods and services rose 0.1% in June after increasing 0.1% in May and 0.2% in April. The index increased by 1.7% for the 12 months ended in June. Prices for services increased by 0.4%, offset by a 0.4% drop in prices for goods. The index less foods, energy, and trade services were unchanged in June after moving up 0.4% in May and has increased 2.3% over the last 12 months.
Activity in the housing market can be described as erratic at best. Existing home sales fell 1.7% in June after climbing 2.5% in May. Year-over-year, existing home sales are down 2.2%. Existing home prices continue to rise, as the June median price for existing homes was $285,700 — an all-time high. Existing home prices were up 4.3% from June 2018. Total housing inventory for existing homes for sale in June increased to 1.93 million (1.91 million in May), representing a 4.4-month supply at the current sales pace. Sales of new single-family houses rebounded in June, surging a robust 7.0% over May’s revised total. Sales in May fell a whopping 8.2%. New home sales are now 4.5% ahead of their June 2018 estimate. The median sales price of new houses sold in June was $310,400 ($303,500 in May). The average sales price was $368,600 ($371,200 in May). Inventory at the end of June was at a supply of 6.3 months (6.7 months in May).
According to the Federal Reserve, industrial production was unchanged in June after increasing 0.4% in May. For the second quarter as a whole, industrial production declined at an annual rate of 1.2%, its second consecutive quarterly decrease. In June, a nearly 3.0% increase in motor vehicles and parts contributed significantly to the 0.4% gain in manufacturing output. Utilities fell 3.6% as milder-than-usual temperatures in June reduced the demand for air conditioning. Total industrial production was 1.3% higher in June than it was a year earlier. After falling 1.3% in May, durable goods orders jumped 2.0% in June. New orders for capital goods used by businesses to produce consumer goods rose 1.4% in June after plummeting 6.5% the prior month. Core capital goods (excluding defense and aircraft) increased by 1.9% last month.
Imports and exports
In another sign that global inflationary pressures continue to be weak, import prices fell 0.9% in June after recording no change (revised) in May. This is the first monthly decline since a 1.4% decline in December 2018. Import prices decreased 2.0% over the past 12 months — the largest year-over-year decline since import prices fell 2.2% for the 12-month period ended in August 2016. Import fuel prices declined 6.5% in June following a 2.3% advance the previous month. The June downturn was the first monthly decline in import fuel prices since a 13.3% drop in December 2018. Excluding fuel, import prices fell 0.3% for the second consecutive month in June. Export prices fell 0.7% in June after decreasing 0.2% in May. The June decrease was the largest monthly drop since export prices declined 0.8% last November. Export prices decreased 1.6% for the year ended in June, the largest 12-month decline since prices plummeted 2.4% for the year ended in August 2016. The latest information on international trade in goods and services, out July 3, is for May and shows that the goods and services deficit was $50.5 billion, down from the $51.92 billion deficit in April. May exports were $210.6 billion, $4.2 billion higher than April exports. May imports were $266.2 billion, $8.5 billion more than April imports. Year-to-date, the goods, and services deficit increased $15.7 billion, or 6.4%. Exports increased by $5.1 billion, or 0.5%. Imports increased by $20.8 billion, or 1.6%. The advance report on international trade in goods (excluding services) revealed the trade deficit to be $74.2 billion in June, down $0.9 billion from May’s deficit. Goods exports in June were $3.7 billion less than the prior month, while imports of goods were $4.6 billion less than May’s imports.
Boris Johnson of the Conservative Party became Britain’s new prime minister, vowing to lead that country out of the European Union even with no Brexit deal in place. Meanwhile, the European Central Bank gave indications it would cut short-term interest rates and restart a program of buying bonds in an attempt to stem the tide of the worsening European economy. In Japan, consumer prices stagnated in June and have risen a scant 0.7% since June 2018 — yet another sign of tepid global inflationary pressures. China’s gross domestic product advanced at an annualized rate of 1.6% for the second quarter and at a 6.2% year-over-year rate. This growth has come despite the trade impasse with the United States.
After showing signs of concern in June, the Conference Board Consumer Confidence Index® rebounded in July, up to 135.7 from June’s 124.3. The Present Situation Index — based on consumers’ assessment of current business and labor market conditions — increased from 164.3 to 170.9. The Expectations Index — based on consumers’ short-term outlook for income, business and labor market conditions — increased from 97.6 in June to 112.2 in July.
Eye On The Month Ahead
Corporate earnings released in August, coupled with the ongoing trade negotiations between the United States and China, are likely to continue to impact market activity. Short term Interest rates will remain unchanged until at least September when the Federal Open Market Committee next meets.
Key August Dates / Data Releases
8/1: PMI Manufacturing Index, ISM Manufacturing Index
8/2: Employment situation, international trade
8/5: ISM Non-Manufacturing Index
8/9: Producer Price Index
8/12: Treasury budget
8/13: Consumer Price Index
8/14: Import and export prices
8/15: Retail sales, industrial production
8/16: Housing starts
8/21: Existing home sales
Monitoring Your Portfolio
You probably already know you need to monitor your investment portfolio and update it periodically. Even if you’ve chosen an asset allocation, market forces may quickly begin to tweak it. For example, if stock prices go up, you may eventually find yourself with a greater percentage of stocks in your portfolio than you want. If stock prices go down, you might worry that you won’t be able to reach your financial goals. The same is true for bonds and other investments.
Do you have a strategy for dealing with those changes? If you are a Premier Wealth Advisors – Managed Solutions client, you definitely do. If you are not, then you’ll probably want to take a look at your individual investments and while you are at it, you’ll also want to think about your asset allocation. Just like your initial investment strategy, your game plan for fine-tuning your portfolio periodically should reflect your investing personality, changes that have occurred in your life that may impact your financial priorities, as well as the market and economic environment.
The simplest choice is to set it and forget it — to make no changes. If you’ve allocated wisely and chosen good investments, you could simply sit back and do nothing. But even if you’re happy with your overall returns and tell yourself, “if it’s not broken, don’t fix it,” remember that your circumstances will change over time. Those changes may affect how well your investments match your goals, especially if they’re unexpected. At a minimum, you should periodically review the reasons for your initial choices to make sure they’re still valid.
Even things out
To bring your asset allocation back to the original percentages you set for each type of investment, you’ll need to do something that may feel counterintuitive: sell some of what’s working well and use that money to buy investments in other sectors that now represent less of your portfolio. Typically, you’d buy enough to bring your percentages back into alignment. This keeps what’s called a “constant weighting” of the relative types of investments.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.
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