Monthly Outlook: August 2019
July ended with the first cut in interest rates since late 2007. The Federal Reserve cut the Fed Funds rate ¼% from 2.4% to 2.15% on concerns about global economic slowing, or in their words, “In light of the implications of global developments for the economic outlook…” We’ll discuss what this rate cut means a bit later. Markets were mostly flat in July, and definitely in summer mode with lighter volume and low volatility. The U.S. stock market gained +1.4%, the international stock market lost -1.8%, and bonds were flat, up +0.1%. The 10-year U.S. Treasury rate is now 2.02%, down from a recent peak of 3.2% in November, 2018. But the bigger and over-arching story is how stocks continue to flip-flop for the past year (and we’re not talking summer footwear). Let’s review the flip-flop trends of the S&P500: July 2018 to September 2018, +6% (flip). September 2018 to December 2018, -18% (flop). December 2018 to April 2019, +23% (flip). April 2018 to May 2019, -7% (flop). May 2019 to July 2019, +8% (flip). What’s next? Overall, the market is barely changed for the past year, stuck at 2,800 give or take 5%. But it’s flip-flopped above/below its 200-day moving average trendline six separate times. That’s a bit unusual. Markets, historically, just don’t go sideways for long. It’s likely that a sustainable trend will develop soon – up or down – and we’ll either resume growing your wealth – or focus on keeping it. We’ll know soon enough. You can trust us, and our iFolios strategy, to keep you on the right side of the trend.
Aren’t Rate Cuts a Good Thing?
During the Great Recession of 2008, you’ll recall how the Federal Reserve slashed interest rates repeatedly with hopes of boosting the economy and markets. The Fed Funds rate was 5.25% in mid-2007 and by early 2009, the rate was down to 0%. During that recession, the economy floundered and the S&P500 lost half it’s value. Eventually, in early 2009, the economy and markets found their floor and both started to recover. The Fed kept the Fed Funds rate at 0% and embarked on quantitative easing monetary policies to keep credit flowing. Cheap & easy money made the markets soar. So, aren’t rate cuts a good thing? Isn’t today’s Fed Funds rate cut good for stocks now? Not necessarily. It matters whether interest rates are being cut for the first time due to new economic weakness or as part of a sustained easy credit cycle. At the peak of an economic and market cycle, the economy is strong, markets make new highs, and life is good. That happened in 2001, 2007, and today, 2019. But then signs of economic slow down start to show up: earnings slow down, unemployment starts to rise, yield curves invert. That leads the Fed to start cutting interest rates and is proof that the economic growth cycle is over. Is that what just happened on Wednesday, July 31st when the Fed cut rates ¼%? It’s too soon to know for sure, but history tells us to watch markets carefully!
Most markets are still above their trendlines, but with all the recent flip-flopping, we are watching carefully for another flop and the need to sell for protection. We acknowledge that all the flip-flops have been frustrating. But we know from experience and from research, that actively managing your allocation between cash, bonds, and stocks is what drives returns. Right now is exactly the kind of scenario when you want an iFolios strategy and not a static buy & hold, stock-picking, strategy. Avoiding a significant decline, whenever it comes, will far outperform any buy & hold strategy.
Wealth is Relative
We’ve been thinking a lot, lately, about wealth and what that means. There is increasing news coverage about currencies, trade wars, and global monetary policy whereby all central banks seem to be racing to out-ease each other. Devaluing one’s currency may boost global trade (your products are relatively cheaper) but does it help investors maintain their wealth? Wealth, you see, is really stored up purchasing power. You expect that your wealth will allow you to buy the same, or more, stuff and services in the future. But that’s assuming your currency, the dollar for most of us, holds its relative value. We’ll be watching global currencies, including gold, closely over the coming years with a goal to not only grow your account in dollars, but to grow your relative wealth, too. Stay tuned as we’ll likely talk about this more in coming months.