What Happened in the Markets in July?

“Good enough” corporate earnings and continued optimism around accommodative monetary policy propelled US stocks and bonds modestly higher for July, though gains were promptly erased by trade tensions to start August. On the last day of July the Fed announced a widely anticipated 0.25% cut in short term interest rates. Stocks initially declined on the news as comments by the Fed reduced expectations for a series of additional cuts.

The Fed Lowers Rates

Early in the year, the Fed appeared set on a program of slow but steady rate hikes. It is interesting that the Fed has reversed course despite a rising market and unemployment near all-time lows. It seems the country has become both accustomed and reliant on low rates, and even the Fed is not totally immune from popular and political pressure. The Fed is typically supportive headed into the fourth year of a President’s term. Despite President Trump’s vocal dissatisfaction with Chairman Powell, it is not inconceivable he could be reappointed if policy is kept loose regardless of whether Trump is reelected. Additionally, there is understandable pressure to maintain interest rate proximity to the rest of the developed world where interest rates are even lower and often negative.

Despite the rate cut, the dollar rose in the month, pushing international stocks lower in dollar terms.

International Assets

One little-noticed trend is that international assets have assumed a lower volatility profile than domestic. Popular perception is that international falls more in down periods, but this has not been the case over the last year or so. We continue to believe global diversification will be richly rewarded over time. The longer the period of US dominance persists, the more forceful the countertrend is likely to be when the cycle rotates.

The Trade War

The US sent a delegation to China for trade negotiations at the end of July. Expectations were low, but the outcome was worse. Failing to receive firm commitments from China on agricultural purchases or intellectual property issues, President Trump announced he would place additional 10% tariffs on $300 billion of Chinese goods starting September 1. China responded by letting its currency fall and ordering state run enterprises to stop purchases of US agricultural goods. Stocks retreated on the escalation. We view this as a fair reaction but note that the trade conflict is going to be a long road with many ups and downs. This week’s activity has been a negative for global growth and raised the risk of more dramatic steps, but we caution investors against overreaction.

Growth Projections

With most of the S&P 500 reporting earnings, growth is projected at -1%, according to FactSet. This result is somewhat better than was expected, so markets are taking it in stride, but a lack of growth provides less support to current valuations. Interestingly, the decline is being driven primarily by companies with a high proportion of sales overseas.

What’s Happening with Tech?

Mega-tech stocks delivered strong earnings on balance. Apple was able to offset weaker iPhone sales through strength at its supporting businesses, while Amazon, Google, and Facebook all posted solid double digit top line growth. This is despite heightened scrutiny over antitrust issues. It’s anyone’s guess how these investigations pan out, but we don’t think they’ll bear much bite in the near term. After all of its privacy stumbles, the FTC only handed Facebook a $5 billion fine—a relative drop in the bucket for a company pulling in over $50 billion in annual sales with another $50 billion sitting in cash. The stock even increased on the news.

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