Market and Portfolio Update
Here comes the Fed AGAIN !
It is hard to believe that we are about to discuss the possibility that the Fed may cut rates in their next meeting at the end of this month. Keep in mind that the reason that the Federal Open Market Committee (FOMC) reduces the Fed Funds rate is to stimulate economic growth, lower financing costs and encourage borrowing and investing. Is that really what we need? The Fed is supposed to cut rates when the economy needs a boost. Unemployment is at a record low, the stock market is at a record high and the economy is still fundamentally strong. Our economic system does not appear to be in need of help. I think something that James Foote, 40-year railroad industry veteran and CEO of CSX since 2017, recently stated on an earnings conference call summed things up quite nicely. He said, "the present economic backdrop is one of the most puzzling I have experienced in my career".
Here’s what FOMC Chairman, Jay Powell, himself delivered in written testimony to Congress earlier this month: “The labor market remains healthy ...the unemployment rate moved down...to 3.7% in June, close to its lowest level in 50 years. Gross domestic product (GDP) increased at an annual rate of 3.1% in the first quarter of 2019, similar to last year's pace.” Powell went on to call this a “strong reading”.
Before we move on, let me repeat something...Unemployment at 3.7% and GDP growth at 3.1%. In the span of my 23 years in the financial services world,I have never been able to utter those two percentages in the same sentence. So, how can Fed Chair Powell possibly think the best course of action is a rate cut? Great question, Right?
Well, the answer seems to be something like this...
Chairman Powell cited what he called "crosscurrents" in his recent testimony. That's his term for the global trade tensions that Trump is creating with China, Europe, Canada, Mexico, and now maybe even India. Let's not forget that Mr. Trump seems to think he can control the Fed. He has been very vocal about his displeasure with Fed decisions to increase interest rates last year and unwillingness to lower rates yet this year. Last month, President Trump actually said in an interview on the Fox Business Network that he “made” Powell but now would like to trade him in for Mario Draghi, the head of the European Central Bank; apparently because Draghi said that he was prepared to provide more stimulus if necessary to support the lagging European economy. Therefore, because President Trump is so unpredictable, Powell seems to think that lowering rates now might mitigate some of that uncertainty. Although the stock appears to be pricing in the rat cut, the jury is still out. We will see what happens next week.
Now, let's catch back up with our friend, Mr. Market. We have said it before and we will say it over and over again...Mr. Market does not like uncertainty...that is a fact. Then why the heck does the market continue to rally when we clearly have an unpredictable and uncertain outlook? One possible thesis is that the economy is indeed still cranking along which should lead to good corporate earnings which is what truly should drive stock performance. Another thought is that stocks are still more attractive than low yielding bonds or cash. For the time being, we are maintaining our current portfolios with a watchful eye. In our opinion, there are just way too many unanswered questions to boldly venture a guess about what the near future holds.
Will the Fed cut rates?
Will we ever have a trade deal with China?
Is the recent inversion in the yield curve a warning of an imminent recession?
Why is gold continuing to rise?
Will the debt ceiling be raised?
Is the OASI (social security) trust fund on a path to insolvency?
How will the impending Brexit affect the rest of the world?
Will Bitcoin soar back to $20,000?.
The point we are trying to make is that we still believe there is reason for caution. We do not take the responsibility of overseeing our client's hard-earned money lightly. Therefore, we intend to remain diversified and tactical as we look for opportunities for growth while keeping a short leash on risk.
If you would like to discuss anything further or have any questions or concerns, give us a call or send us an email.