The Markets: The S&P 500 index closed August down (1.97%) bringing it to +15.51% year-to-date. The Dow finished down (2.15%) bring it’s year-to-date run to +11.55% and the NASDAQ finished the month (2.97%) bringing the year-to-date number to +18.70% year-to-date; according to the Wall Street Journal.
In recent weeks, markets have been volatile amid fears of an imminent recession. While we agree that we are in the middle of a world-wide economic slowdown, the indicators just don’t support the base case for recession at this time. We believe the U.S. economy is slowing, the markets are reflecting the slowdown, and we are apprehensive about an impending recession. Recent history suggests that hiring freezes rather than layoffs will be a strong indicator of a pending recession. Steady hiring throughout 2019, as reported by ADP, indicates that recession is not going to happen this year.
Trade Wars: According to the White House, we are winning the trade war with China. However, President Xi Jinping of China does not seem like he is willing to give in to Trump’s bully tactics. There is no doubt China has flaunted the World Trade Organizations rules, and violated just about every other norm that we in the west find acceptable. They threaten security, they steal technology, and they undermine democratic values in developing nations.
European leaders as well as Democratic leaders have been mostly silent, content to watch Trump slug it out with President Jinping. Whatever the outcome, the U.S. negotiations will set the precedent for the world when it comes to trading and negotiating with China. While most of these folks profess they do not like President Trump’s tactics, they are silently cheering for his success. On the other hand, China has enormous wealth and a stubborn oligarchy that will hold Xi Jinping’s feet to the fire. We do not see an end to the negotiations anytime soon, which will continue to put downward pressure on the markets.
Fed Watch: The Fed meets again in mid-September. Expectations are high that the Fed will lower rates a couple of times, if not now, at least through the end of 2019. The European Central Bank also signaled easier policy. While the economic backdrop is much more difficult for companies, and the trade wars are compounding those issues, equity markets typically have benefitted from a re-rating on the back of lower risk free interest rates
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