RGWM Market Thoughts & Portfolio Update – June 17, 2019
The last two weeks have seen some significant developments to global equity markets. Fed Chairman Jerome Powell suggested the central bank was prepared to act to sustain the economy if the trade war weakened the growth outlook. A Friday evening Tweet from President Trump indicated that a deal with Mexico had been reached that would indefinitely suspend potential tariffs from the United States. In response to the Fed Chair’s comments, markets produced the second-best day of 2019, the best since the January rally. In combination with the relief from the suspended potential tariffs on Mexico, the market has continued to rally to within 100 points of the S&P 500’s all-time highs.
In spite of these developments, the economic and market environment still holds various risks and even some of these apparent positive developments described above maintain certain caveats. When the Federal Reserve Chairman states that the bank is prepared to act, it suggests that the probability of rate cuts rises significantly. While lower rates are inherently meant to drive investors towards riskier assets like stocks, the language and move itself suggests that the Fed sees weakness in the growth outlook of the economy. Will the rate cuts themselves drive equity investors to a market that is perceived as having rising risks? The alleviation of tariff threats towards Mexico removes a significant part of the reasoning behind the Fed Chairman’s suggestion of implementing additional rate cuts at all. If rate cuts have been priced into markets as they currently stand, what happens if the Fed doesn’t follow up the interpreted statements with cuts as soon as expected or if the language itself changes in a later statement? While it’s impossible for us to see the future, the market has shown itself to be highly reactive to the day to day news cycle and the risks of the rate cut narrative softening is apparent. These potential risks don’t even include the obvious questions around the ongoing trade talks with China, the upcoming 2020 Presidential election, potential impeachment developments, general geopolitical risk involving relations with Iran, North Korea, and Russia, as well as BREXIT.
Despite the risks above, the current economic environment still holds reason for optimism. Unemployment remains close to record lows, inflation is at low levels, and the chances of a rate hike in the near future are slim. As we predicted in our previous newsletter, the trade dispute with Mexico reached a quick resolution and while the talks with China are still ongoing, we still believe a deal to end the conflict is the most likely outcome. We continue to feel comfortable maintaining exposure to equity markets. A diversified portfolio containing domestic and global equities, fixed income, and alternatives is our preferred positioning to navigating the ebbs and flows of the market cycle. While we will not be drastically overhauling our TAAP portfolios, we will be making some adjustments. Overall, we will be slightly lowering our equity risk and increasing our exposure to fixed income and alternatives. Within equities, we will be marginally lowering our exposure to international stocks and further positioning towards domestic equities.
As always, if you have any questions or concerns, please do not hesitate to contact us.
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