Week 28 Sitrep

The U.S. stock market had a nice week last week on the heels of the G-20 Summit meeting in Osaka, Japan. An announcement was made at the summit that the U.S. and China agreed to return to negotiations for a potential trade agreement. Notice this was not an announcement of a new trade agreement – both sides simply agreed to return to the table for further discussions. However, the big news was that the U.S. agreed to postpone any further tariffs on Chinese imports. That news was enough to push the S&P 500 Index up 1.7% for the week. Smaller companies did not benefit as much with the Russell 2000 Index up only 0.59% for the week.1

Source: J.P. Morgan Asset Management, Weekly Update, 7/8/19

 

The only sector within the S&P 500 Index that was NOT up for the week was the energy sector, which finished lower by 0.9% on the week. The price of WTI Crude closed at $57.42 for the week continuing to show modest gains for the calendar year. Large companies continue to deliver very good performance for the year, especially those companies with a tilt towards growth.2

Source: J.P. Morgan Asset Management, Weekly Update, 7/8/19

 

The big news last week shifted during the week from the ongoing trade negotiations (seen as positive for stocks) to a stronger-than-expected jobs report on Friday (seen as bad for stocks). Please read this carefully because it is hard to understand. It would appear that “good news is bad for stocks” while “bad news is good for stocks”. That would seem counter-intuitive but let me explain. We commonly see this mentality in the markets when there is an anticipation of slower economic growth that could lead to a recession. When that happens investors in the market begin to expect the Federal Reserve to “help” the market by offering incentives to invest (usually by lowering interest rates). Therefore, if there is evidence that the economy is slowing, the market is happy because investors believe the Fed will step in. However, if there is evidence that the economy is not slowing (i.e. a strong employment report) then it may appear that the Fed does not need to offer incentives and the market will be disappointed. It’s a crazy cycle.

 

Much of the recent news from the financial media has centered on expected declines in economic fundamentals. Recent negative sentiment readings from individual investors as measured by the American Association of Individual Investors (AAII) bolster the case that investors believe the economy is heading for recession3:

Source: Bespoke Investment Group, July 8, 2019

 

We have seen many economic indicators slowing over the last quarter. Importantly, the indicators are revealing slower growth as opposed to negative growth. Slower growth does not portend an economic recession. However, we really have a mixed bag of statistics to analyze right now. On the concerning side we see:

  • Deceleration of US economic indicators
  • Yield curve inversion (10-yr Treasury rates are lower than 3-month Treasury rates)
  • Many U.S. companies issuing profit warnings for 2nd quarter4

Source: Bespoke Investment Group, Economic Indicators, 7/2/19

Source: Bespoke Investment Group, Equity Market Pros and Cons, 6/28/19

 

However, we also see several encouraging signs from the markets:

  • Interest rates in the market continue to be favorably low
  • Inflation expectations remain subdued
  • S. stock indexes set new all-time highs last week
  • The potential for new trade agreements5

Source: Bespoke Investment Group, Equity Market Pros and Cons, 6/28/19

Source: Bespoke Investment Group, Equity Market Pros and Cons, 6/28/19

 

We continue to watch upcoming events for news that may pull the market up or down:

  • July 9-10: Fed Chair Jay Powell testifies to Congress about the economy
  • July 15th – beginning of earnings season for the 2nd quarter
  • July 30-31: next Fed meeting (markets are expecting an interest rate cut of ¼%)

Our investment committee continues to see constructive gains in the markets with favorable risk/return relationships for U.S. stocks. We also recognize that 2019 is the third year of a presidential term, which has historically been a good year for U.S. stocks.6 Based on currently available information, we do not anticipate a U.S. economic recession in the next six months. We will continue to monitor data as it is released to update our views.

Source: Bespoke Investment Group, Chart of the Day, 7/9/19

 

If you’d like to schedule a time to discuss your portfolio or the markets in detail, please feel free to call our office at (281) 616-5935. We welcome the opportunity to sit down with you and learn more about your situation so we can help you optimize your portfolio to meet your financial goals for years to come.

Engrave Wealth Partners Investment Committee

Bill Day, CFP®, CIMA

Taylor Parker, CFP®

Greg Parker


Footnotes:
1. P. Morgan Asset Management, Weekly Update, 7/8/19
2. P. Morgan Asset Management, Weekly Update, 7/8/19
3. Bespoke Investment Group, Pros and Cons, 6/28/19
4. Bespoke Investment Group, Pros and Cons, 6/28/19
5. Bespoke Investment Group, Pros and Cons, 6/28/19
6. Bespoke Investment Group, Pros and Cons, 6/28/19

Login