Client Note July 2019

August 1, 2019

 Portfolios saw modest gains in July, approximately 1-1.75%, while the SP500 saw similar gains.  Small cap stocks moved up less than one-half percentage point.   International equities dropped more than 2.5% with emerging markets trailing.

The long Treasury etf (TLT) was down most of the month, until the last day when it managed to finish flat for the month.  Corporate bonds fared slightly worse with high yield underperforming corporates and treasury bonds.  Lower interest rates most directly impact Treasuries as there is no risk of default, whereas on corporates and high yield, a change in the perception of the quality of the debt can push prices despite change in interest rates.

Gold was flat, giving up a percent on July 2, climbing into mid-month then giving it back to end flat for the month.   Gold miners also dropped out of the gate, then climbed almost 11% before dropping yesterday and ending the month up almost 4%.

We are seeing some very constructive moves in the cannabis sector, after significant declines Curaleaf gained 10% in July and Charlottes Web almost 20%.  The etf, MJ was sold out as its heavy weight in Canadian issues continues to wither.

All told, the general equity and bond markets were flat, international did poorly, precious metals were positive and other commodities (base metals, agriculture and oil) fared poorly.

Fed Announcement

Yesterday’s announcement by the Fed to reduce the overnight rate it lends to banks from 2.5% to 2.25% was expected.  Prior to the announcement markets had priced in an 80% likelihood of a .25% cut and only a 20% change of a .5% cut.  Over the past 12 months, growth in auto production, housing, durable goods orders have all been in a gradual decline.  I and others have stated that the Fed had tightened far more quickly than in other periods.  Some combination of slowing growth and recognition that the Fed tightened too much too quickly are what likely brought about today’s action.  June’s economic numbers in some areas have shown an uptick.  It may be a change in trend or just a pause in a continued decline, only time will tell.

Yesterday’s and today’s violent market reactions to ‘not promising more rate reductions’, and a very modest increase in tariffs on Chinese goods bely the fragile psyche of the market.   Very poor economic numbers in the Eurozone and China (which together are about 25% greater than US GDP) are pulling the global economy down and parts of the US economy are beginning to feel it.  After the sugar-high of corporate tax cuts, earnings in 2019 are looking to be about 2% lower than last year.

End-of-trade-war hopes, expectations of better earnings, the gift of cheaper money have been the drivers of stock prices this year.  These ideas are getting denied or delayed and without some re-ignited positive expectations we may see the general stock market vacillate until there is more clarity.   Or, these two days may just be a temper tantrum, showing the markets waning tolerance of slower global trade and dramatic difference between US interest rates and Europe.  And after another day or two we may be off to the races again with the expectation that these issues will be resolved soon.

Adam Waszkowski, CFA

Leave a Reply