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            Weekly Market Update (July 29 – August 2, 2019)

            By Nela Richardson August 05, 2019

            Stocks recorded their worst week this year on worries that escalating trade tensions could further slow global economic growth. The U.S. announced a 10% tariff on $300 billion worth of Chinese goods starting in September. Crude oil prices experienced the largest one-day drop in over four years before partly recovering later in the week, while 10-year Treasury yields fell to the lowest level since 2016. In what was an action-packed week, the Federal Reserve cut rates for the first time in a decade, citing uncertainty in the outlook, softness in business investment, and below-target inflation. The Fed's assessment of the U.S. economy, however, did not change, with officials acknowledging strength in the labor market, a pickup in consumer spending, and a moderately growing economy. The July jobs report confirmed that despite trade tensions and other global uncertainties, the labor market remains a source of strength for the U.S. economy.


            The Fed Cut Rates. What’s Next for the Markets?

            “Are we there yet?”? This question is heard frequently on summer road trips. From the backseat, children eagerly await the vacation planned for them but may struggle to understand how long the trip will take, and then grow impatient when it takes longer than expected. Parents in the driver seat may also be uncertain about the timing of their arrival as they navigate detours and changing road conditions.

            This summer we’ve also seen the markets anticipating a new destination: a cut to interest rates by the Fed to help prolong the economic expansion. Last week the Fed did as expected and lowered the range of its benchmark interest rates to 2.0% -2.25% from 2.25% -2.5% to help offset rising uncertainties from too-low inflation, U.S. China trade tensions, and slowing global growth.

            Yet, in a press conference after the rate announcement, the Fed chairman indicated that future rate cuts were unlikely this year.? In effect, the Fed stated that the destination towards lower rates had been reached, and, like an irritable backseat driver, the markets showed their disapproval for the direction the Fed had taken by falling 1% the day of the press conference.? These losses extended throughout the week as a detour appeared in the market’s path: another round of tariffs on Chinese imports announced by the White House.? With new uncertainties emerging on the Fed’s next steps, investors are again asking, “Are we there yet?”

            While the timing of future interest rate moves is unknown at this time, we think the economy continues to move in the right direction for three reasons.?


            1. Road conditions appear favorable, and economic fundamentals are positive

            Recent data shows that economic fundamentals, though slowing, are still a positive underpinning for the bull market.? GDP growth slowed to 2.0% in the second quarter from 3.1% in the first quarter, but was above the 1.8% consensus and in line with the average pace for the expansion. Also, the economy is showing renewed sources of strength as consumer spending, the engine of growth for the economy, has rebounded from its slump earlier this year, even as business investment remains anemic. Inflation has also edged up recently, though it is still short of the Fed’s 2% target.? The Fed’s recent rate cut should help boost business confidence and stabilize interest rates at higher levels, allowing the economic expansion to continue, in our view.

            Moreover, since 1970, the markets have responded favorably to a cut in benchmark interest rates when the economy was expanding. As the chart below shows, S&P 500 total returns increased 9% on average in the first six months after the first rate cut, and they increased 14% a year after the Fed cuts rates for the first time.? Only during the recession years of 2001 and 2008 was an initial rate cut not followed by an increase in stock prices over subsequent months. We think that solid economic growth, in combination with the Fed’s recent rate cut, will help share prices continue to climb higher and the bull market to continue.

            ??????????????????????? S&P 500 total returns
            First Rate Cut
            ?? 6 months later
            1 year later
            Nov-70
            27%
            17%
            Nov-71
            16%
            22%
            Jul-74
            -18%
            16%
            May-80
            36%
            32%
            Nov-81
            -2%
            16%
            Nov-84
            11%
            19%
            Jun-89
            10%
            17%
            Jul-95
            14%
            23%
            Sep-98
            24%
            23%
            Jan-01
            -4%
            -8%
            Sep-07
            -11%
            -20%
            Average
            9%
            14%

            Source: FactSet, Morningstar Direct, Edward Jones calculations

            • Job gains show the economy is moving in the right direction

              Though its speed is slowing down, the U.S. economy is still heading in the right direction, as evidenced by Friday’s jobs report. The number of jobs created in July decreased to 164,000 from the 193,000 in June.? Yet this pace of job gains is well above the 110,000 that is needed to sustain the present growth rate for the economy. Additionally, wage growth edged up, which signals that the ill effects of too-low inflation on consumer pocketbooks is still being held at bay for now.1
            • Trade detours are not roadblocks

              Last week the market also saw an escalation of trade tensions when the U.S. announced a 10% tariff on $300 billion worth of Chinese goods starting in September.? The new tariffs are likely to impact the prices of consumer goods more directly than the 25% tariffs on $250 billion in Chinese imports already in effect. Trade tensions have taken a toll on the economy.? U.S. manufacturing, which accounts for 20% of the U.S. economy, has weakened over the course of the year as business investment and confidence has waned. Yet the broader market, including the much larger service-sector component of the economy, has so far been mostly resilient to rising trade uncertainties.

              Despite this latest detour, we still expect a trade deal between the world’s two largest economies to be negotiated because of the overwhelming benefits of trade to both countries and to global growth more broadly.? That being said, we expect the path to a negotiated deal to be bumpy, with occasional backtracking and stalled progress along the way.
            • A road map for the future

              In our view, the primary risk to a bull market is that the Fed raises interest rates too aggressively and curtails economic growth.? This risk seems for now to be firmly in the rearview mirror, as the Fed has provided assurances that it will keep rates low and continue to act as appropriate to extend the bull market despite elevated uncertainties from trade and other global economic conditions.

              As investors, we also must adjust to occasional detours in our path caused by market events that can increase the volatility of portfolio returns. We suggest you follow the road map by staying the course -- invest in a diversified portfolio that includes an appropriate mix of equities and bonds that are in line with your comfort with risk.? With that strategy in place, uncertain road conditions don’t have to be roadblocks. They may just cause a detour that can eventually lead you back on track to your destination: achieving your long-term financial goals.

            ?Nela Richardson, PhD
            Investment Strategist

            Source: 1. Bloomberg


            Index Close Week YTD
            Dow Jones Industrial Average 26,485 -2.6% 13.5%
            S&P 500 Index 2,932 -3.1% 17.0%
            NASDAQ 8,004

            -3.9%

            20.6%

            MSCI EAFE* 1,863.85 -2.7% 8.4%
            10-yr Treasury Yield 1.84% -0.23% -0.84%
            Oil ($/bbl) $55.21 -1.8% 21.6%

            Bonds

            $111.95 0.9% 6.9%

            Source: Bloomberg, 08/02/19. *5-day performance ending Friday. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.


            The Week Ahead
            The earnings season will begin to wind down, with 13% of companies in the S&P 500 reporting second-quarter results. Economic news will also be light, with notable releases being the ISM non-manufacturing index reported on Monday and a fresh read on inflation Friday.

            Review last week's weekly market update.

            Important Information

            The Weekly Market Update is published every Friday, after U.S. markets close.

            The Dow Jones Indexes are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use.

            All content of the Dow Jones Indexes ? 2017 is proprietary to Dow Jones & Company, Inc.

            The Dow Jones, S&P 500 and Barclays Aggregate Bond Indexes are unmanaged and are not meant to depict an actual investment.

            Past performance does not guarantee future results.

            Diversification does not guarantee a profit or protect against loss.

            Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

            Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

            This information is approved for use with the public.

            It is intended for informational purposes only.

            It is believed to be reliable, but its accuracy and completeness are not guaranteed.

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