Those who followed the adage “sell in May and go away” might be kicking themselves now. Markets continued to power up in July, supported by positive Fed expectations, a decent start to the earning season, and relative improvements in U.S.-China trade tensions.
First interest rate cut in more than a decade
As expected, the Federal Reserve lowered the target range for the federal funds rate 0.25% to 2% – 2.25% at its July 31 meeting. No one was surprised by this. In fact, the expectation of a rate cut was so high, many investors were trading as if it had already happened. They were willing to pay more for a stock before the cut because they expect that company to be even more profitable in the future, due to lower interest rates.
The big question now is whether this was a single adjustment to support the economy, or will it be the first cut in a longer-term trend. Many investors expect as much as 0.75% more in rate cuts over the next 12 months, but the Fed could decide the July cut was a one-off. A surprise pause in interest rate cuts could be a significant disappointment, leading to a sizable market pull-back.
Update on earning season
Over the past two years’ earning seasons, it seems we’ve been bracing for bad news only to be pleasantly surprised with continued profitability. This season so far has been much of the same. Although expectations were low, a majority of companies are reporting better-than-expected earnings. Earnings remain one of the most important pillars of this market.
The trade war continues
A U.S. delegation, led by Treasury Secretary Steven Mnuchin, recently met in Shanghai to continue discussions. The perception that tensions were easing aided July’s positive returns. In reality, no one can predict the outcome of this issue. As recently as Tuesday, President Trump took to Twitter, accusing China of not fulfilling their promise to buy U.S. agricultural product. He went on to say that the U.S. has “all the cards” and warned that if he’s reelected in 2020, China will face a much tougher deal.
We’ll continue to keep an eye on all these factors and keep you informed of any major developments. It is our hope that these updates provide some clarity into complex issues, so please let us know if there is anything you’d like to discuss further. We wish you a great August and a wonderful Back-to-School season!