Dear clients and friends,
At Perseus Wealth it is very important to us that you are well informed about what’s happening in the markets. Here is a brief recap of what has been going on over the last month or so and what we expect in the month ahead. As always, please call us with any questions.
What’s happening now:
- Fixed Income – Due to some weakening of U.S. economic data, June saw a strong increase in the probability for the Federal Reserve to reduce the current Fed Funds Rate. Although the Fed decided against making any changes during June’s meeting, probabilities remain strong that interest rates could move even lower in the coming months. In the meantime, trade uncertainty and speculation about interest rates have dropped the 10-year Treasury down to a level not seen in over a year and a half. The current yield on the 10-year Treasury rate is below the level economic fundamentals would seem to justify and it would not be surprising for yields to begin to move higher in the coming months. Speculation around macro events such as interest rate cuts, the current cycle of trade tariffs and the potential for negative long-run effects on the economy can create short-term volatility in the bond markets – but at a lesser degree than equity markets.
- Equities – Most of the S&P 500 selloff experienced in May was erased by the third week of June when the S&P 500 set a new (albeit marginal) all-time high. What changed? Among the biggest detractors in May were the “one-step forward, two-steps back” type of trade negotiations with China, the announcement of potential tariffs to be placed on Mexican goods and reports that U.S. economic data softened. All three of these major topics reversed course in early June and led to a market rally when issues with Mexico were quickly resolved and a positive focus on the G20 summit produced optimism for future trade agreements. In addition, between constant and vocal White House discontent with Fed policy (and its chairman) and softening U.S. economic data, the likelihood of a Federal Reserve Rate Cut of the Fed Funds Rate before September has significantly increased. This could act as an additional stimulus to the economy and bring at least temporary relief to the Fixed Income market. The equities markets appear to be going through a transitionary period and will likely require both a solid deal with China and a clear interest rate path in order to sustain new all-time highs… neither of which will probably come quickly.
- Economic – Much of U.S. economic data has begun to soften. One strongly followed indicator of economic health, job growth, missed expectations, while consumer sentiment surveys indicate people are increasingly worried about how tariffs could impact their daily lives. Although the economy may be slowing in the short-term, there should be little immediate cause for concern of a recession - as the long-term trend remains strong. Internationally, growing tensions between the U.S. and Iran have added pressure to the markets and on the economy. And the President of the European Central Bank, Mario Draghi, stated that their central bank has room for stimulus if needed, strengthening the argument of a transitionary period in the global economy.
Looking Ahead – Key decisions, which have the potential to impact both the Fixed Income and Equities markets, will be made in the coming weeks. One of the most important is between the two largest economies in the world, the United States and China. Trade officials from the U.S. and China are expected to meet in advance of the G20 summit in Osaka, Japan, to pave the way for progress during the summit itself. Also taking center stage will be the Federal Reserve, whose “data dependent” decision making will determine whether a change in interest rate policy will take place at their July meeting.
Bottom Line – As mentioned earlier, the market and the economy give every appearance of currently going through a transitionary period (from expansion to contraction or vice versa) where macro events can impact market trajectory for the remainder of the year. Typically during transitionary periods, headline risk can have larger than normal influence on the price of equities, so one should anticipate increased, transient volatility as narratives make their way to the major media outlets. It is important to note that markets can emerge out of transitionary periods relatively quickly, moving to either contraction or expansion status, requiring additional rigor in our monitoring of the data. Finally, although economic data has clearly softened, given the economy’s continuing long-term positive trajectory, there appears to be little chance of a recession within the next six to twelve months.
John and Sean
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that any strategy will be successful.