Note: This market review was published on July 18th, 2019 and may not be reflective of current market or investing issues.
U.S. Markets ended the second quarter near fresh all-time highs, but the path taken to get there was far from smooth. We saw the return of volatility to its highest levels since the major sell-off in December 2018 with the volatility index nearly doubling to over 20 in the first half of May before slowly returning to the lower teens by the end of the quarter.1 This volatility was influenced by multiple factors, including the continued trade war between the United States and China (the two largest economies in the world), the increasing tensions in the Middle East (with Iran saying that there is no longer a path to a diplomatic solution with the United States), and the Federal Reserve’s lack of clarity on their future policy.
The Federal Reserve has continued to hint that a rate cut is coming, but we still lack clarity on when the first one will be and how much it will be cut. The market is currently assuming a rate cut of at least 0.25% and as much as 0.50% in July.2 If there is no cut in July, it could bring a short-term consolidation to equity markets in the U.S. as investors wait to find out what the Fed’s outlook on the economy means for risk assets.
The trade war between the U.S. and China saw talks break down in the early part of last quarter with increased tariffs from both sides. Tensions cooled slightly after President Trump and President Xi met at the G20 summit in June and agreed to restart trade negotiations between the countries and to put any further tariffs on hold. No tariffs have been removed at this point; however, trade talks have resumed and both sides say that there is a path to a deal.
Tensions in the Middle East continue to be a significant threat, especially to the oil market. In the last three months there have been attacks on oil tankers in the Strait of Hormuz, for which Iran has denied responsibility. Also, a U.S. drone was shot down, for which Iran claimed responsibility stating that the drone had illegally entered Iranian airspace. Tensions in this region continue to rise with Iran saying there is no longer a path to a diplomatic solution with the United States. These tensions arose after the U.S. decided to reimpose sanctions on Iran that had been removed as part of the nuclear agreement between Iran and the international community.
While new all-time highs are being reached in U.S. stock markets, global stocks have not fared as well since the last recession. The MSCI EAFE index (a broad measure of international equity) reached its most recent peak in early 2018, but has yet to return to the all-time highs that were seen in 2007.3 Economies outside of the U.S. have not had the same success throughout the recovery since the Great Recession and their stock markets reflect that.
Over the next few months it is likely that China will increase government stimulation in their economy in order to combat declining growth. The European Central Bank (ECB) will likely continue their policy of easy money and could possibly increase stimulus. The Federal Reserve will likely cut rates by at least 0.25% over the next three months which will confirm their change in policy from the last rate hike in December 2018. All of these factors could be supportive of global economic growth which should be positive for global equities.
Longview Financial Advisors, Inc.
1, 2, and 3: Information found at CNBC.com
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