The economy continues to soften but does not yet appear to be reaching a tipping point. Employment remains durable if not robust and consumer confidence together with consumer spending continues unabated. Housing however is beginning to show signs of weakness as more homes come on the market and prices have dropped modestly for the first time in many years. The technology sector has experienced some volatility as it navigates a path forward with expected trade deals and tariffs still in a state of flux. The AI and robotics sectors show no signs of slowing down.
The markets however seem to have entered a period of the summertime doldrums and appear to be drifting upward perhaps due in part to the exhaustion of getting whipsawed from the on again off again tariffs and trade deals. And it is true that several important trade agreements have been finalized with some of our important trading partners.
Considerations looking forward are the ever present expectations forming around inflation and the Fed’s response to inflation in interest rate policy. The Fed, having made small reductions in interest rates last year, seems to be in a holding pattern for now as inflation too seems to be in a holding pattern. Higher tariffs may be playing a role in inflation’s stubborn holding pattern and the lurking threat of higher tariffs are not helping as future deadlines approach. In any case, the current interest rate regime remains to high to stimulate a robust housing market which, as mentioned above is becoming much softer. This is not necessarily bad as housing is such a large component of inflation indices that as housing softens, inflation could resume its downward trend and in turn, the Fed could lower interest rates until an accommodative equilibrium materializes.
Our outlook remains that the market will trend upward in a choppy pattern. Even though the economy continues to soften somewhat, inflation remains stubborn. We do not foresee a downturn at present but, if inflations resumes a downward trend and interest rates come down in response, the market could also move higher in response. As always, there are many unforeseeable risks which can easily alter the outlook. We remain cautious and vigilant. Please remember that because these quarterly thumbnail sketches are very brief, so do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.
Very Best Regards,
Joseph L. Toronto, CFA
Affiliated Investment Advisors 