The markets have entered a new period of high volatility and economists and market analysts are having a hard time coming up with a reason for it. We began the month of July with the markets racing ahead with 6% to 7% gains reaching an all time high, only to fall back drastically erasing most of the gains of both June and July. Our accounts all still have sizeable gains on average near 40% so far this year. We believe the markets will stabilize barring any major disruptive economic developments. We expect relatively modest market growth through the remainder of this year. There is evidence of market sector rotation happening whereby institutional investors are rotating out of the high P/E, high growth tech giants and back into smaller stocks in consumer, financial and utility sectors. The current market is probably not like the vulnerable tech boom of the late 90’s (yet) as this market, despite the recent high valuations has much more support from higher and growing revenues and earnings.
Some analysts are concerned that China’s economy is not doing well and may be entering a recession. The Central Bank of China has in the past two weeks cut interest rates twice in what are seen as emergency steps and may have contributed to our own market’s correction. This also suggests that a weak Chinese economy will keep global inflation and commodity price increases largely subdued. However, the U.S. economy continues its record growth, but is clearly softening, painfully slowly. This month’s recent inflation measures of consumer and producer prices dropped further reaching new lows near 2.5% on a monthly basis, not far from the Fed’s 2% target. These better than expected CPI and PCE reports also seem to have started a mild rotation out of the tech giants and into interest sensitive smaller stocks. This also re-energized the bond market with long-term interest rates continuing modest declines. These effects seem to have solidified speculation that the Fed will begin its own regime of short-term interest rate cuts. The Fed forecasters have an increasing small likelihood of a rate cut perhaps later this month, and of a near certain cut in September.
The scenario of a proverbial soft landing of the overall economy seems to be on track. Employment and housing remain strong and inflation is near the 2% target. Consumer wages and income remain high and growing. Unemployment is not rising meaningfully. The housing market remains strong largely due to a persistent housing shortage. The federal infrastructure fiscal stimulus is a multi-year ongoing process that continues to support and sustain our economic growth.
As always, we remain cautious and vigilant. Please remember that because these quarterly thumbnail sketches are very brief, do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.
Affiliated Investment Advisors 