Recent rhetoric from the Fed, reports from the G20 meeting between President Trump and President Xi Jinping have resulted in improved optimism by the stock market. At the time of this commentary (July 5th), the S&P 500 had grown 1.7% since the meeting between the Presidents. At the same time, with evidence that the economy is slowing down, there has been increasing expectations of a rate cut at the Fed meeting scheduled for July 31. Although we enjoy periods of market growth, we remain cautious that this is a crucial time in the markets that will likely determine the market direction for the second half of 2019.
Admittedly, it takes great patience to wait for the political system to work out the current challenges of trade. Additionally, the guessing game of Fed moves, and potential moves can be jarring. The trade negotiations between the US and China are an ever evolving and nearly daily rhetoric about trade. Therefore, headline risk from trade remain high and can move markets dramatically in either direction. Furthermore, the July 31 Fed meeting will be heavily watched by markets and reactions may be large depending on both: the decision to cut rates as well as the Fed statement and the following press conference. According to CME Group data, a rate cut in July is heavily anticipated by the futures market.
These two themes are likely to drive markets for the remainder of 2019. Economic cycles are important and with evidence mounting that the economic growth is slowing down, hope that the Fed cuts rates early enough to avoid further contraction and possibly hold off or avoid recession are ever present in the markets.
Without positive resolution to the trade war and without action by the Fed at the appropriate time, further contraction is very possible. Even if a recession is avoided in that situation, markets could see some large swings and corrections.
It certainly looks like it could be a make or break time for the market. If everything works out, markets are likely to surge. If neither works out, markets are likely to suffer. However, even in the negative case, a recession will likely take more time to develop due to the fact that economic slowing and recessions are linked, and generally take months and quarters to truly develop.
This market requires patience, and after a tough year, patience is admittedly difficult to conjure up inside of our investor psyche. If we want to make sure we are successful in investments, patience is necessary from time to time. It is one of the least glamorous, and often initially, least satisfying investor traits. If an investor wants to fight fear of missing out and fear of losing it all, it is necessary, but none of us find it fun.
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