Summer Heat - July
2019 Recap
The Federal Reserve moved on the last day of
July to cut rates by a quarter of one percent, the first reduction since 2008.
Concerns by investors that this cut may be a
"one and done," along with another round of China tariffs the
following day, hurt stock prices after a positive July +1.31% SPX.
This is only the fifth time in 25 years the
Central Bank switched from raising to lowering rates, according to the Wall
Street Journal.
The beleaguered Fed Chairman, Jay Powell, is
trying to balance concerns about a weaker global economy and a strong domestic
one. The SPX closed on July 31st at 2980, -1.1% on the day, snapping a
36-session streak of less than 1% move in either direction.
10-year US Treasury notes closed July at 2.034%,
while the WSJ Dollar Index rose to 91.25 near a 12-month high. Today they trade
at 1.85%.
Fed officials said they would end their
runoff of the $3.8 trillion asset portfolio two months earlier than planned. In
other words, they are no longer tightening monetary and credit conditions.
The U.S. unemployment rate in June was 3.7%,
near a 50 year low. The U.S economy grew at 2.1% in Q2-19 seasonally adjusted.
Year over year U.S. wages are rising at 3.5%, and the Savings rate is 8%
according to Larry Kudlow, the Chief Economic Advisor to the President. Job
growth in the U.S. has averaged more than 170,00 new jobs per month. The
biggest beneficiaries of these trends are the working population.
Manufacturing is slowing. However, housing is
gaining strength in many areas of the country, particularly for the entry level
home buyer. Core C.P.I rose only 1.6% for the year ending in June, below the
FED's 2% inflation target.
In past cycles, when there was no recession
and the FED cut rates, stocks did well the following year. Small rate cuts in
both 1995 and 1998, were followed by strong stock market action.
In 2007, the last time we saw the start of a
rate cut cycle, FED funds were 5.25%. However, a recession and financial crisis
was only a year away.
The odds of a recession going into a
Presidential election year are low. Yield curves have inverted, but not at the
closely watched 2-year to 10-year Treasury spread level.
With 77% of companies in the SPX reporting
EPS so far the earnings decline is -1.0% for Q2-19. Revenues are up 4.1%.
Materials have negative growth and Industrials have no growth. All other
sectors were up, led by Communications and Health Care.
The forward 12-month P/E ratio on the SPX was
16.8 x the end of July. This P/E ratio is above the 5-year average of 16.5 x,
and the 10-year average of 14.8 x, according to FactSet.
With strong gains from stocks, bonds and gold
through July, some profit taking in August has already begun, and may continue
as trade talks ebb and flow.
President XI seems to be waiting out
President Trump's term in office. In the first half of 2019 China dropped to
our number 2 trading partner, after Mexico.
Go out and enjoy the summer breeze! We still
have the monetary wind at our backs. Our economic sails are at full beam reach
and domestic seas are generally smooth.
