The seesaw between trade tensions and easy monetary policy has been fairly balanced this year. However, the balance is shifting as the Fed easing policy seems baked in and the trade war concerns persist despite the administration’s decision to delay the most recent round of tariffs on Chinese goods. Fixed income markets seem to be pricing in not only a benevolent Fed prepared to offer a few “insurance” cuts; they’re also discounting some risk of a full scale rate cutting cycle as evidenced by the inverted yield curve. An uptick in recession risk makes us more cautious on overall risk levels, especially in economically sensitive equity holdings and below-investment grade corporate debt.
The pervasive concern amongst investors over the durability of this record breaking economic cycle has created multiple knee jerk sell-offs over the course of the past year. Three have been driven by headlines regarding the trade war and two by brief yield curve inversion. The downdrafts have been quick and tempered, as have the rallies. Those that went to the sidelines in cash have suffered as most markets are still up over 8% this year. All the while, the US consumer keeps chugging away but has slowly become one of the lasts bastions of global economic strength. Handicapping how to play this has become increasingly difficult. We have lengthened duration on the fixed income side and still believe growth and yield-oriented equities will outperform all other asset classes over the next year.
The most likely scenario for the balance of the year is that markets will stay range-bound, assuming there is no definitive end to trade tensions with China. Valuations are ripe but the fruit is not rotting yet as buybacks will keep EPS growing. The Fed will continue to be accommodative and the US consumer will keep spending which should forestall a recession in 2020. In general, monetary stimulus seems exhausted but it’s been fool’s play to underestimate central banks hubris in trying to be economic puppet masters. We have our mid-year investment summit this week so stay tuned for further intel on the balance of the year.
Please let me know if you have any questions via phone at 804-774-2087 or email at Jesse.Ellington@middleburgfinancial.com.
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