Q2 ended with a continuation of the 2019 rally, marking one of the best half-years in recent memory. That said, at of the close of Q2, the broad U.S. equity market was roughly 8% higher from one year ago. Given how far the market traveled in that 12-month period, a 8% gain is no small feat.
Looking forward, the picture gets a little more complicated… There is uncertainty surrounding the Federal Reserve’s apparent attempts to “heal” an economy that isn’t really that sick.
Most of the economic data continues to impress: The unemployment rate remains below 4%, and nonfarm payrolls are closing in on 150 million. Q1 GDP of 3.1% growth is unlikely to be matched in Q2, with expectations closer to 2%.
US PMI’s are the weak spot in the domestic economic picture, falling of late to the low 50s. World PMI’s are now at or below 50 signaling that ROW (rest of the world) is teetering on contraction.
The continued rally in equities is not a surprise but does come with greater volatility and risk. With even more uncertainty ahead this year—Brexit, China, trade, the Fed, and tech regulation—similar gains for the remainder of the year seem unlikely.
Trade, Fed action, and political uncertainty weigh on the market as hopes for interest rate cuts and global stimulus supports a perceived “put” for long positions. As we said at the beginning of the year: it wouldn’t take much “less good news” for our proprietary Astor Economic Index® (AEI) to begin to decline to levels at which we’d reduce risk and beta in our portfolios. As the “very good” economic numbers get further in the rearview mirror, the more recent numbers look weak in comparison. As a result, we steadily reduced beta throughout the first half of the year.
The adage, “Expansions don’t die of old age—they get murdered,” keeps us watchful. It looks like the Fed is loading the gun after releasing statements following its June meeting, hinting at an upcoming rate cut. Meanwhile, the European Central Bank seems intent on following the Fed’s lead, with its own round of possible cuts.
Maybe I could be convinced that a rate cut by the Fed is needed, but I do find it hard to justify with wages increasing, employment below 4%, and stocks up by double-digit percentages this year. Does the Fed have a new mandate that includes the ROW? Are they worried about growth? Inflation expectations?
Sure, the AEI has declined, but only to around “average.” Remember, average growth is still good, and stocks can and go up in an average environment. But the Fed seems intent on creating a very dangerous precedent with monetary policy, one that could have dire consequences down the line. A close friend of mine who is a doctor has warned against giving antibiotics to treat a cold. First, it won’t cure the cold. Second, and more importantly, taking antibiotics too frequently and for no real reason can make them less effective against diseases that can kill you.
Hopefully, the Fed isn’t giving the markets antibiotics for a cold. Stay tuned…
Economic Data – Source: Bloomberg
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