The Markets: The S&P 500 index closed July down (1.22%) bringing it to +18.05% year-to-date. The Dow finished down (1.05%) bring it’s year-to-date run to +14.39% and the NASDAQ finished the month (0.61%) bringing the year-to-date number to +22.31% year-to-date; according to the Wall Street Journal.
With continued gridlock in Washington preventing any meaningful form of stimulus, either in the form of a second tax cut or through infrastructure spending investment spending growth, too, should continue to soften after slowing last year: a lingering trade-war, restricted immigration (and therefore a shrinking talent pool) and a too-strong dollar have all made corporations less willing to invest. These factors are unlikely to change in the near-term.
By contrast, consumption will likely remain healthy. Consumer spending growth should remain relatively stable through the rest of this year on the back of high levels of confidence and a steady, though not especially impressive, improvement in wage income.
All told, the slowdown is coming and likely sooner rather than later. That said, a recession remains unlikely, especially as the Federal Reserve starts to ease monetary policy. More about that in a minute.
We wish a happy birthday to the U.S. business cycle expansion, which just turned 10 and is now the longest ever. Expansions appear to have grown longer over time and the current one does not look like a particular outlier compared with other recent cycles.
Trade Wars: U.S. negotiators are in China as we put pen to paper. However, we do not expect any material progress just yet. Trade tensions have been the main driver of weakness this year.
Fed Watch: The Fed did cut rates by ¼ point on the final day of the month, stating that this is not the beginning of an easing cycle but rather, a mid-cycle adjustment. We do not agree with Fed; we do not see this as being mid-cycle. As we said; this is the longest expansion in history. More likely, we are in an extended late-cycle period. The current shape of the yield curve is puzzling with a flattish inversion, meaning the shorter termed U.S. Treasury Notes yield is higher than the longer term notes, but not by much. This likely reflects the bond markets anticipating a prolonged rate cutting cycle over the next two years, which typically forecasts a recession in the not too distant future.
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