There is always uncertainty – whether we are talking about weather, financial markets, or sporting events, it doesn’t matter. Anticipating future events comes with the unknown. Predict the daily weather one year from now, highly uncertain. Predict the weather tomorrow and the likelihood of a successful prediction increases, but it is still far from exact. The same can be said for sports. Have a five-run lead in the 9th inning? It’s probably safe to say that your team will win but it isn’t certain.
Financial markets are a bit of an odd duck. In the prior two examples, shortening the prediction time, one year to one day for the weather, and one game to one inning for the baseball game, increased our certainty. With financial markets, longer is generally easier because most things that matter to financial markets tend to trend around an average over long periods of time. When markets deviate, assuming they will return to rend over the long run is usually a safe bet. However, when we are predicting the short-term for financial markets, there is heightened degree of uncertainty.
Case in point: Since April 2019, I have been writing that I was concerned about the divergence between what I was seeing in economic indicators and what the financial markets were doing. Since April the stock market (basis S&P 500) kept creeping higher, achieving several new all-time highs culminating in a record close of 3025.86 on July 26, 2019. As I am writing this note at 11am EST on 8/2/19, the S&P 500 has fallen 3.6% over the last 4 days.
Here’s the irony – the economic indicators I follow have actually been improving over the last several weeks. GDP for the 2nd quarter came is slightly better than expected, with consumer spending being very strong. The job market remains robust, while inflation remains below 2%. Corporate profits for the 2nd quarter are coming in much better than I expected. Despite the improving data the Federal Reserve cut interest rates on July 31st for the first time in 10 years.
While indicators in the US are solid and improving, the same is not true globally. The International Monetary Fund (IMF) reduced their forecast for global economic growth to 3.2% (down from 3.5% at the beginning of the year), stating the “ risks to the forecast are mainly to the downside”. The two biggest factors they cited were the US-China trade war and Brexit (UK leaving the EU).
The near-term uncertainties I am monitoring are:
- The US-China trade war – which shows no sign of resolution given the President’s decision on 8/1/19 to impose additional tariffs on China starting 9/1/19.
- Brexit – The UK has a new Prime Minister who needs to negotiate a deal to leave the EU by October 31, 2019. Until that is resolved I expect European economies to be on hold.
Investing seasonality – the chart below shows the average monthly performance of the S&P 500 since 1954. As you can see August through October is historically the weakest period during the year.
Given all factors I remain cautious and neutrally positioned in investment portfolios with heightened risk monitoring. Feel free to call us with any questions or concerns.
August 2019 Calendar of Events (comments and suggestions always welcome)
August 2nd International Beer Day
August 8th My birthday!
August 13th International Left-Handers Day
August 16th National Tell a Joke day
August 26th Women’s Equality Day – as the son of a single mom and the father of 3 wonder young women, I support improving equality for women in all areas.
P.S. Thank you for your referrals. They are making a big difference in my practice. Feel free to share my name with your friends on Facebook or LinkedIn. Thank you to Ben G., Michele M. and Melanie M. for introductions to friends and family this month.
Sources: Raymond James & Associates, Nottingham Advisors, CNBC.com
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