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August 15 2019 Market Update

By on Aug 15 in Economics, Finance, Financial advisors, Market Update, Worth sharing

Brexit, Trade and the Fed… Oh My!

July was a fairly stable and positive month for the markets. That is, until the Federal Reserve announced a cut to its target federal funds rate on July 31.

The cut itself didn’t come as a surprise, but Fed Chairman Jerome Powell’s comments – in which he noted that this was a “mid-market” correction and not the beginning of a lengthy series of cuts – rattled markets to the point that Powell felt compelled to issue a clarification the same day.[1]

Going into August, President Trump’s announcement of new tariffs on $300 billion worth of Chinese goods, followed by the Chinese decision to depreciate the yuan, brought more turmoil and volatility.[2]

With the trade dispute appearing to only escalate, both the Fed’s outlook and its decisions will be even more closely scrutinized – especially given that their policymaking both influences and is informed by the global economic environment, which is weakening.

But how does all this impact investors?

Political Uncertainty in Europe

We’ve discussed the importance of policy uncertainty before, and July brought more of it. The entrance of Boris Johnson as the new prime minister of the UK adds a plot twist to the saga of Brexit.

The situation has been fraught from the beginning, and with the arrival of a strong “Brexiter” at Downing Street it may become even more so. Johnson has indicated a willingness to pursue a “no-deal” Brexit in the event that negotiations with the EU fail.[3] Government forecasts have indicated that such a move could force Britain into a recession – especially given that the economy contracted in the second quarter.[4]

The situation simply raises the level of economic and political uncertainty in Europe, which is already struggling with slugging growth. While a no-deal Brexit is likely to impact the UK itself the most (not to mention Ireland, due to the difficult history of its land border with the UK), European companies and consumers will also be affected.[5] Importantly, the event would not be an end to negotiations – after all, it’s likely that the UK will want some trade and policy agreements in place with the European Union.[6]

From our vantage point, the situation could add to the headwinds facing Europe in terms of economic growth. As some economists have noted, the specific outcomes are difficult to predict, which could bring higher volatility in terms of investment performance.[7]

Trade Policy Uncertainty at Home

While the US doesn’t have as much exposure to Brexit on an economic level,[8] the consequences could ripple across the pond. However, there are other sources of uncertainty that are of growing concern – namely in the area of trade.

One of the reasons the yuan’s depreciation was so frightening for markets is concern about the trade war becoming a currency war.[9] This is a complicated issue, as a sharp depreciation would also hurt Chinese businesses and consumers, but it does underscore the sense that the conflict is escalating rather than resolving.[10], [11]

The trade dispute has already had an impact on the global economy, and if it continues it could begin to dampen prospects for US economic growth.[12]

The Potential Limits of the Fed

The impact on the US is particularly important because further intervention by the Fed – such as July’s rate cut – might not be as meaningful as we might expect.

The Wall Street Journal aptly described this as the Fed’s conundrum: given where we are right now, can rate cuts really foster more investment and help buffer the impact of a slowdown? Rates were already very low before the cut, and while cheaper debt is obviously helpful to both business owners and consumers, it may not exercise much influence on overall demand for products and services.[13]

This is actually one of the reasons the Fed chose to cut now – when employment is strong and the economy appears to be stable. As Fed Chairman Jerome Powell put it, “An ounce of prevention is worth a pound of cure.” On the other hand, some research has indicated that pre-emptive cuts may not impact the likelihood of a recession, and could even fuel volatility.[14]

In other words, the jury is out on whether the rate cut (and the potential for future ones) will have a material impact on preserving the longest economic expansion in US history.[15]

The Impact on Investors

Bloomberg Businessweek succinctly summed up news in the last days of July and the early days of August with this apt headline: “Powell speaks, Trump Tweets, China Reacts, Markets Freak. Repeat.”[16]

It’s easy to focus on the news coming out of Washington and the markets, and that’s understandable. No one likes uncertainty and we have a natural urge to seek conclusions – and any normal person is liable to react emotionally when conclusions aren’t available.

Even good news, such as data showing that we’ve been in a period of unprecedented economic growth, can be intimidating. We want to know what happens next so we don’t get complacent and caught off guard.

But day-to-day (or even week to week) headlines aren’t a solid foundation for portfolio decisions. The Fed, China, trade – each of these factors can have an impact on an individual depending on their risk exposures, investment priorities, and other financial needs.

But to navigate them, we believe firmly in stepping back, seeing the big picture, and designing portfolios that are built to weather a storm. Where it makes sense, current events might warrant an opportunistic decision or a shift in risk-management priorities. But they also might not: it really does depend on your individual situation.

All that is to say: please don’t hesitate to call us to discuss these issues. We’re committed to not only providing you with prudent advice, but to talk through any concerns and questions you might have.

In our last newsletter, we wrote about the loss of our colleague, Sean Santoyo. Sean’s passing has been felt deeply by all of us. In his memory, JSF has made a donation to Children’s Hospital of Los Angeles, an institution that meant a lot to Sean. For those of you who have inquired about making a contribution in Sean’s memory, the family has set up a fund at the Children’s Hospital of Los Angeles.

As we approach the end of the summer, we hope that you enjoy these long August days with family and friends, and we wish all of the kids heading to off to college much luck and success!

JSF Financial

 


Securities are offered through Mid Atlantic Capital Corporation (“MACC”) a registered broker dealer, Member FINRA/SIPC.
Investment advice is offered through JSF Financial, LLC, which is not a subsidiary or control affiliate of MACC.

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Historical data shown represents past performance and does not guarantee comparable future results.  The information and statistical data contained herein were obtained from sources believed to be reliable but in no way are guaranteed by JSF Financial, LLC or MACC as to accuracy or completeness. The information provided is not intended to be a complete analysis of every material fact respecting any strategy.  The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy. Diversification does not ensure a profit or guarantee against loss. Carefully consider the investment objectives, risks, charges and expenses of the trades referenced in this material before investing.

Asset Allocation and Diversification do not guarantee a profit or protect against a loss

The S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market.

3-, 5-, and 10-year treasury notes are a debt obligation issued by the United States government that mature in 3-, 5-, or 10 years, respectively. Treasury notes pay interest at a fixed rate once every six months and pay the face value to the holder at maturity.

The Bloomberg Barclays U.S. Aggregate Bond Index measures the performance of the total U.S. investment-grade bond market. The index includes investment-grade U.S. Treasury bonds, government-related bonds, corporate bonds, mortgage-backed pass-through securities, commercial mortgage-backed securities and asset-backed securities that are publicly offered for sale in the United States.

The MSCI Emerging Markets Index consists of 24 countries representing 10% of world market capitalization.  The Index is available for a number of regions, market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 24 countries.

The MSCI Europe Index is part of the Modern Index Strategy and represents the performance of large and mid-cap equities across 15 developed countries in Europe. The Index has a number of sub-Indexes which cover various sub-regions market segments/sizes, sectors and covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI World Index which is part of The Modern Index Strategy, is a broad global equity index that represents large and mid-cap equity performance across 23 developed markets countries. It covers approximately 85% of the free float-adjusted market capitalization in each country and MSCI World Index does not offer exposure to emerging markets.


Sources:
[1] Source: https://edition.cnn.com/2019/07/31/business/fed-rate-cut-july-meeting/index.html
[2] Source: https://www.cnbc.com/2019/08/02/perfect-storm-building-for-market-correction.html and https://edition.cnn.com/2019/08/05/investing/dow-stock-market-today/index.html
[3] Source: https://edition.cnn.com/2019/07/29/uk/no-deal-brexit-marketing-campaign-intl-gbr/index.html
[4] Source: https://www.bloomberg.com/opinion/articles/2019-07-31/fed-rate-cut-markets-remind-federal-reserve-that-it-can-t-win and https://www.ft.com/content/a86a489e-ba97-11e9-8a88-aa6628ac896c
[5] For example: https://www.thelocal.fr/20190802/more-than-140000-jobs-will-be-lost-in-france-in-case-of-no-deal-brexit
[6] Source: https://www.theguardian.com/politics/2019/jul/30/no-deal-brexit-how-likely-is-it-what-would-be-impact and https://www.cnbc.com/2019/07/18/brexit-impact-on-the-us.html
[7] Source: https://www.cnbc.com/2019/07/18/brexit-impact-on-the-us.html
[8] Source: https://www.cnbc.com/2019/07/18/brexit-impact-on-the-us.html
[9] Source: https://edition.cnn.com/2019/08/05/business/usd-yuan-currency-war/index.html
[10] Source: https://www.cnbc.com/2019/08/09/chinese-yuan-peoples-bank-of-china-sets-midpoint-at-7point0136-per-dollar.html
[11] Source: https://www.wsj.com/articles/chinas-currency-weakening-escalates-trade-war-11565027431
[12] For some color on the impact of the trade war thus far, consider: https://www.washingtonpost.com/world/2019/08/07/germany-was-europes-economic-growth-engine-trade-wars-could-drive-it-recession/?noredirect=on and https://www.npr.org/2019/07/26/745547982/the-u-s-economy-is-slowing-as-trade-war-takes-a-toll
Other industry-specific examples: https://www.cnbc.com/2019/08/01/oil-plunges-down-more-than-6percent-after-trump-adds-tariffs-on-china.html and https://www.cnbc.com/2019/08/01/retail-stocks-tank-as-they-could-take-the-biggest-hit-from-the-new-round-of-china-tariffs.html
Likelihood of a recession: https://www.bloomberg.com/news/articles/2019-08-08/u-s-recession-odds-pick-up-as-economists-cut-growth-estimates?srnd=premium
[13] Source: https://www.wsj.com/articles/feds-conundrum-can-lower-rates-combat-investment-chill-11564651802?mod=hp_major_pos1
[14] Source: https://www.wsj.com/articles/what-if-the-fed-was-wrong-11564604518?mod=article_inline
[15] Source: https://www.cnbc.com/2019/07/02/this-is-now-the-longest-us-economic-expansion-in-history.html
[16] Source: https://www.bloomberg.com/news/articles/2019-08-08/powell-speaks-trump-tweets-china-reacts-markets-freak-repeat?srnd=fixed-income

Performance table sources:
BBAB: http://performance.morningstar.com/Performance/index-c/performance-return.action?t=XIUSA000MC
S&P 500: http://performance.morningstar.com/Performance/index-c/performance-return.action?t=0P00001G7J&region=usa&culture=en-US
MSCI Europe: https://www.msci.com/documents/10199/db217f4c-cc8c-4e21-9fac-60eb6a47faf0
MSCI World and Emerging Markets: https://www.msci.com/documents/10199/c0db0a48-01f2-4ba9-ad01-226fd5678111

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