News & Events
August 2019 Market Commentary
YorkBridge Wealth Partners Investment Committee
August 7, 2019
While it is not typical for the YorkBridge Investment Committee to provide commentary on market moves intra-quarter, we felt it was important to address the action that has taken place over the last two weeks, help to break down the events that have led to this dramatic uptick in volatility, and explain our viewpoint going forward.
The global markets have whipsawed as concerns over the slowing of global economic growth and an escalation in the trade war with China have come back into focus. In response, market volatility has increased substantially which, in our view, is a reminder to investors that attempting to time the market is never a sound investment strategy.
Let’s take a look at what has unfolded over the past two weeks:
As anticipated, the Federal Reserve cut short term interest rates by 25 basis points, a move that, in theory, should have supported markets, but instead caused them to sell off. Why did this occur? We believe primarily for two reasons: First, we believe the rate cut had already been priced into the market and secondly because Fed Chair Jerome Powell suggested in his public commentary that this rate cut should not be interpreted as a signal for further cuts later this year, something that the market had been expecting.
In essence, it appears as though the Fed was in a “no win” situation last week. Had they decided to make a more significant rate cut, this could have been construed as a sign that the U.S economy is weaker than expected which could have caused a panic. However, by acting as anticipated, the market simply “bought on the rumor and sold on the news.”
While still digesting the Fed’s latest comments, President Trump announced additional tariffs of 10% on the remaining $300 billion of Chinese imports. The President’s announcement came as a surprise as previous comments suggested talks between officials of the two countries had been constructive.
Following the President’s tweets about additional tariffs, three important things happened:
China retaliated by allowing their currency to weaken below what has been a historical level of support (an action that causes U.S. Exports to become more expensive in the global marketplace).
China announced a boycott on American agricultural products.
The U.S. officially has labeled China a “currency manipulator,” which has multiple legal and market ramifications.
Where are we now and how should investors proceed?
During times of heightened volatility it is prudent for investors to take a step back and focus on the long term. As we often point out, it is important for investors not to over-react to short term headlines. This is especially true during the summer months when trading volume tends to be less than normal and allows for market moves to be magnified in both directions.
In our view, nothing has meaningfully changed to the underlying fundamentals. The U.S. economy continues to expand albeit at a slower pace. Corporate earnings for the first half of 2019 are still growing in line with expectations. The employment picture and consumer spending remain strong while inflation has consistently come in below the Federal Reserve’s target of 2%. What may have changed is the overall investor sentiment. The mood of this country has shifted negatively, and with good reason given the horrendous tragedies in both El Paso and Dayton – not to mention the many other incidents that don’t receive national press. Investing, particularly over the short-term, has an emotional overlay and is something we are very mindful of.
With that said, we are paying close attention to a number of economic data points and most particularly to interest rates. Global rates have fallen precipitously over the past few months as a result of a slowing global economy and easing central bank monetary policy. The yield curve (the difference between long and short term interest rates) has flattened considerably and the difference between the 10 & 2 year treasury now sits at just 0.06% at the time of this writing. Though we question the ability of this metric to time the next recession our fear is that this can become a self-fulfilling prophecy.
We are advising our clients to remain committed to their strategic asset allocation and continue to be diversified. Bouts of market volatility can be unsettling, but often prove to be just another bump in the road.