Last week was filled with bad economic news:
- The May jobs report came in at only 75,000 jobs added to the economy. Both March and April figures were revised down. More importantly, payroll gains have averaged 164,000 in 2019, a sharp decline from the 223,000 for all of 2018. Clearly the job market is losing some steam.
- While still at an impasse with China on trade, the Trump administration announced new tariffs on Mexico.
- The International Monetary Fund highlighted increased risks of a global growth slowdown.
So what happened? The stock markets had the most positive week since January 2019. Go figure!
Why? I believe the market is betting that the Federal Reserve (and other central banks around the world) will come to the rescue by increasing monetary stimulus by lowering interest rates.
I’m not sure the market has this right. First, while the FED has been sounding dovish (open to cutting interest rates), my sense is that they would prefer not to cut rates now. Second, even if they do cut rates, with interest rates already at very low levels, the amount they could cut rates would likely not be enough to offset the impact of trade and other factors impacting global growth.
If the FED doesn’t do what the market is expecting, we likely see a swift negative reaction. If the FED does cut rates, I think the upside is limited as the market has already priced that in.
As such, I am continuing to stay neutrally positioned, with a diversified balanced approach. This allows us to participate in some of the gains the market has had recently, while reducing our downside risk if the market reverses.
Feel free to call if you have any questions or concerns.