Hero image

July 15 2019 Market Update

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

What are We Supposed to Think About Interest Rates?

June was an interesting month for markets: despite a weak jobs report in May and growing evidence that the economy could be downshifting, markets soared across the board.[1] In fact, the Dow had its best June since 1938, and investors with 60 percent in stocks and 40 percent in bonds had their best first half of a year since 1997.

Part of this was driven by the market’s conviction that the Federal Reserve would be cutting interest rates to support a continued economic expansion. As of July 2, 2019, the futures markets had priced in 100% certainty of a rate cut after the Fed’s July meeting.[2]

But a much stronger jobs report for June again threw market observers off balance,[3] and the intense scrutiny of each report raises two important questions for investors: how important is jobs growth for the Fed, and if companies are hiring and the economy is still growing why would we need to reduce interest rates?

Let’s take a look at some of the more complicated issues underlying recent market moves.


What’s Going on With Jobs?

Employment is a critical input into the Fed’s view of the economy. Unlike other central banks, the Fed has a dual mandate: to support employment and to maintain low but positive inflation, with a target annual inflation rate of 2 percent.[4]

As a general economic principle, focusing too much on one can come at the cost of the other: so maximizing employment could force wages up and spike inflation, while minimizing inflation can slow growth and weaken employment.

Click on image to view larger size.

Thus the Fed’s goal is to balance inflation and employment in a way that maximizes employment without pitching inflation past 2 percent.

That’s part of what makes the current situation so interesting. Inflation has been low, but at the same time, the unemployment rate has also fallen to reach historic lows.[5]

Jobs growth has also slowed overall. While the June jobs report brought a lot of enthusiasm, looking at year-to-date jobs growth we can see that it’s down from 2018 and closer to levels we saw in 2016 and 2017. The spike in 2018 was largely due to tax reform, so most economists consider it to be an aberration more than anything.

But overall, as the Fed looks at these and other data points, it might see that there is room to further stimulate economic growth, and thus boost inflation a bit, without negatively impacting the unemployment rate.

Is there a Real Reason for a Rate Cut?

Of course, the jury is out on what will happen next: as you might imagine, there is always disagreement when it comes to what the Fed should or should not be doing.

The arguments for a rate cut are partially related to inflation, as we noted above, but also come down to providing support for a few sources of weakening economic data.

For example, one broad measure of business confidence plummeted to its lowest level in history. The Morgan Stanley Business Confidence Index fell to 13, its lowest level since 2008. A reading above 33 is considered the threshold for economic growth. The manufacturing sub-index fell to zero, its lowest on record.[6]

A national index of factory activity also dropped in June to its lowest point since October 2016, the third decline in as many months.[7] While the index is still in “expansion” territory with a reading of 51.7 (those above 50 are considered expansive), it has been tiptoeing down. Wavering business sentiment appears to be echoed by consumers: consumer confidence also slipped in June. [8]

All of these indicators have been driven primarily by trade tensions with China and Mexico and the related uncertainty in trade policy.

The Challenge of Leading Indicators

You’ve probably heard the expression “perception is reality.” In our experience, when it comes to markets this is often true. Whether it’s animal spirits, panic, or a sense of growing concern about the economy, perceptions drive behavior, which can have a real impact on results.

In the case of the Fed, the justification for a rate cut might be debatable. After all, reducing the cost of borrowing right now doesn’t seem like an urgent matter – borrowing costs are already incredibly low, and it’s unclear that reducing those costs further will materially encourage greater economic growth.

However, the market’s confidence has arguably been very reliant on a rate cut.[9] As expectations for a rate cut wavered following the July 5 jobs report, equity markets fell and anticipation for forthcoming (as of this writing) testimony to Congress by Fed Chair Jerome Powell took on new urgency.[10]

Along with forthcoming inflation data, sentiment is another data point for the Fed – part of the dance between Fed statements and market interpretations, one that can be challenging for Fed officials to balance (and for investors to parse).

We are not overly concerned about the prospects of a significant downturn right now. But we are also not partial to wearing rose-colored glasses. As you’ve probably heard us say, markets go up and markets go down, and the best preparation for either situation is a balanced view and a risk-managed approach to investment management.

If you have any questions as we head into the next month, please don’t hesitate to check in.

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.

Confidentiality Note: This email communication including all attachments transmitted with it may contain confidential information intended solely for the use of the addressee. If the reader or recipient of this communication is not the intended recipient, or you believe that you have received this communication in error, please notify the sender immediately by return email or by telephone at (323) 866-0833 and PROMPTLY delete this email including all attachments without reading them or saving them in any manner. The unauthorized use, dissemination, distribution, or reproduction of this email, including attachments, is strictly prohibited and may be unlawful.

The information expressed herein are those of JSF Financial, LLC, it does not necessarily reflect the views of Mid Atlantic Capital Corporation (MACC). Neither JSF Financial LLC nor MACC gives tax or legal advice.  All opinions are subject to change without notice.  Neither the information provided, nor any opinion expressed constitutes a solicitation or recommendation for the purchase or sale of any security.  Investing involves risk, including possible loss of principal.  Indexes are unmanaged and cannot be invested in directly.

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.


[1]  https://fortune.com/2019/07/03/stocks-bonds-rise-higher-sync/

[2] https://www.bloomberg.com/news/articles/2019-07-02/fed-s-mester-not-yet-ready-to-support-interest-rate-decrease

[3] https://www.marketwatch.com/story/could-the-fed-surprise-the-stock-market-by-skipping-a-july-rate-cut-its-not-out-of-the-question-2019-07-08?mod=economy-politics

[4] https://www.richmondfed.org/publications/research/economic_brief/2011/eb_11-12 and https://www.federalreserve.gov/faqs/money_12848.htm

[5] https://www.cnbc.com/2019/07/05/jobs-report-june-2019.html

[6] https://www.bloomberg.com/news/articles/2019-06-14/record-drop-in-morgan-stanley-business-gauge-flags-economic-woe

[7] https://www.reuters.com/article/us-usa-economy/us-manufacturing-stumbles-under-weight-of-trade-tensions-idUSKCN1TW315

[8] https://www.cnbc.com/2019/06/25/us-consumer-confidence-june-2019.html

[9] For a useful discussion on the price of credit versus market expectations, please see https://www.bloomberg.com/news/audio/2019-07-05/surveillance-kudlow-to-fed-take-back-rate-hike-podcast
At about 2:45, economist Julia Coronado discusses the issue of market expectations in depth.

[10] Source: https://www.wsj.com/articles/global-stocks-fall-as-u-s-rate-cut-prospects-recede-11562563827

What's trending

view all

Sorry, there is no service at the moment.

Sophisticated planning for personal outcomes.
Contact us and meet your advisor today.

Meet us today

JSF logo

Subscribe to our mailing list and stay up to date with the latest information.

By submitting this form, you are consenting to receive marketing emails from: . You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact