Are we on the "Path" of progress?

July 11, 2019

 

There is a path to higher stock prices and more gains this year for our model portfolios.  But after the initial surge to new market highs as trade tensions with China ease for now, it may feel like threading a needle. 

 

Yes, with the announcement of a truce after the crucial meeting between Presidents Trump and Xi at the Osaka G-20 meeting, we all avoided a big hit to global stock prices.  But kicking the can down the road (again) means the issue is still hangin’ overhead, and it increases the pressure to steer these negotiations into port.  Our opinion on China trade has not changed.  We expect an agreement, mainly because both sides are highly motivated.  President Xi would benefit from positive economic news as his party tries to tighten its hold on semi-autonomous Hong Kong.  And President Trump would clearly benefit as he readies for Campaign 2020.  Although the timeline is unclear, perceived progress will push global stocks higher.  This deal is a critical factor in eliminating headwinds that are effecting global economic growth.   

 

Here in the US, comments from Federal Reserve members indicate they’ve pivoted and are willing to, as Chairman Powell says, “support activity as needed.” That’s good, but there is now a growing disparity in expectations between the markets and the Fed. Is a Fed cut in July a done deal?  We think so, but after that it’s anybody’s guess.  We’re in the camp that says the Fed will announce a 25 basis point cut at the next meeting, but then adopt a wait-and-see approach.  Currently, futures odds have a 25bp cut at 74% and a 50bp cut at a surprising 26%.

 

Overseas, there has been talk of the European Central Bank cutting rates as well.  Unfortunately, with interest rates so low there is not much room to create a significant effect.  All in all, however, global central banks remain accommodative and will remain so for the foreseeable future.

 

All of this adds up, as we see it, to increased volatility as we enter the summer months.  However, we also see a sturdy US economy, especially in the service sector which is four times bigger than manufacturing.  We feel this could provide the fundamental building blocks for equity gains as 2019 continues.

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