Trade News Driving Markets
A number of people have commented to me that the (stock) market “seems a little crazy lately”. Despite what may have seemed like a rather tumultuous summer for the financial markets, it really hasn’t been that bad. In fact average daily volatility has been fairly normal and the stock market measured by the S&P500 has actually logged two all time highs this year, the most recent one in July. We believe the stock market has “felt” volatile because of news flows, and more specifically, news flow around the China trade issue. A 6% decline in May and a 7% decline in early August were very average in a normal market environment and largely reflected investor sentiment driven by news flow mostly around the on-again, off-again China trade negotiations.
As of now, Wall Street has returned from summer vacation and the stock market has struck a somewhat more positive tone. A possible reason for this is trade negotiations with China are back on the table, now scheduled for October. Of course, that positive view could change with tomorrow’s tweet. But, with the admission that there is no way to forecast it, our sense is the odds are increasing that there will be some sort of agreement with China in the not too distant future, perhaps 3, 4, 5 months, which would support a stronger economic outlook. There are a couple of things that indicate the odds of a trade agreement are improving: 1) recent rhetoric on both sides appears to be a little more constructive of late and 2) both sides have increasingly important reasons to come to an agreement relatively soon.
This summer the market has also been wrestling with the implications of an inverted yield curve. Not too many people even know or care about an inverted yield curve. This phenomenon occurs when short term interest rates exceed longer-term interest rates and has been associated with recessions. We believe for a number of reasons that the recent yield curve inversion, while significant, is not an indicator of an imminent recession.
So what does this have to do with financial planning? As part of our services, we manage all or a material portion of investment assets for most of our clients. An important part of our responsibility as a fiduciary is to consider market and economic factors and to conduct research. Speaking of research, we will be holding our Q4 investment committee meeting on September 25 at which we will consider these and other issues as we set investment policy for Q4. Following the meeting, I’ll provide an update on deliberations and outlook. Looking forward, a few of the factors we believe should support a more positive tone for the stock market include:
· Expectations for another rate cut by the Fed later this month
· Potential for positive news regarding the China trade negotiations
· Steady economy and consumer spending
· Improving optimism around the corporate earnings outlook, particularly Q4.
Robert Toomey, CFP/CFA
Vice President, Research