The 2nd quarter of 2019 brought new gains for investors with the S&P 500 Index celebrating the achievements of last quarter by moving into a new-high territory—but despite the good year-to-date numbers, market enthusiasm was tempered by the increased risks of a synchronized global slowdown.
In May, equities swooned and bond rates fell sharply after reports that China had balked at previously agreed upon elements of a possible trade deal. President Trump tweeted in response that the U.S. was raising the current level of tariffs on $250 billion of imports from China from 10% to 25%, and threatened to raise his bet an additional $300 billion. This immediately increased fears that such an escalation of the trade war would be just enough to tip an already slowing global economy into outright recession.
Perhaps most notable was the continued deterioration in the monthly PMI (Purchasing Managers Index), which is a respected forward indicator of global manufacturing. The JP Morgan Global Manufacturing Index fell to a reading of 49.4 in June, the lowest since October 2012. It was also the second consecutive drop below 50, confirming the global economy is slowing.
In the midst of growing concerns about trade wars and the economic slowdown data, markets warmly welcomed the change in tone from the Federal Reserve Chairman Jay Powell in a speech in early June following the market sell-off, declaring the Fed was ready to “act as appropriate” to support the economy, which was immediately taken by markets to mean that the Fed is about to cut interest rates.
If actual policy rate cuts are coming in July or later it will mark a substantially different U.S. central bank posture. Unlike many prior periods of economic weakness, policy makers appear poised to act preemptively as they may feel it is less costly to stoke a slowing economy than tasked to reignite it.
With markets believing global central banks are indeed on a path for a coordinated global easing cycle, the latest risk for the markets is overdone expectations of multiple rate cuts. Markets could be sorely disappointed if new economic data causes the Fed to choose a more hawkish, less simulative posture.
Along with the unprecedented developments on the monetary front, some good news came from the G-20 meeting held at the end of June. There, President Trump and China’s President Xi held a meeting that helped de-escalate the trade drama by agreeing to restart negotiations to try to reach a deal, again.
As the third quarter gets underway, investors continue to wrestle with deep-seated anxiety that the bull market cycle is on its last legs, the victim of a slowing global economy, a worsening trade war between the U.S. and China, and the lagged impact of last year’s perceived policy mistake by the Federal Reserve interest-rate increases.
Indeed markets may be due for a breather in the near-term, but the much larger risk of the economy falling into recession and driving stocks into a bear market is likely reduced if another round of monetary stimulus is truly on the way.
Historically, risk taking and equity markets are more often rewarded when policy makers stimulate the economy. More monetary stimulus appears to be on the way, but how much and when are uncertain. However, with some luck, the storms on the horizon may prove to dissipate once again. Looking forward, all eyes are on the Fed while keeping calm investors believing ‘the trend is your friend’.
At KG Advisors we prioritize financial planning and dynamic investment management as we seek to limit investment drawdowns as we believe portfolios need protection from a variety of risk events. If you have had changes in your current situation or if you would like to discuss the challenges and opportunities that the current market may present, please contact or office at (800) 542-4916 anytime. Donna, Wendy, Suzie and I would like to wish you a healthy, happy and safe summer!
Eric W. Kendrick, CFP