Welcome back to news town, baby! Sorry for the wait – our writers fought an epic battle with FINRA and lost. Learn about that here. We’ve missed a lot since late June, so we’ll begin by catching you, the reader, up on key highlights from July and then discuss what’s happening right now.
July in Review
In large part, markets reacted to two key developments last month: earnings season and the fed rate cut.
Earnings SZN: While a majority of S&P companies beat earnings and revenue expectations last month, corporate profits grew at a slower rate for the second time in two quarters.
Additionally, a majority of the firms that gave guidance for next quarter’s earnings weren’t very optimistic. Companies like Align Technologies, AMD, and Square were among the stocks that fell despite beating earnings due to poor guidance.
Overall, earnings were good enough to sends plenty of stocks to new highs thanks to everyone’s expectation of a rate cut.
FED Cut: The market soared when chances of a rate cut seemed high. Remember: the FED cuts rates when they think the economy might need a boost from cheap capital soon. It got to the point where stocks would go down in response to positive economic data because people wanted to be certain the FED would cut rates.
So, why would investors want the FED to cut interest rates so bad if cuts could signal trouble?
The short answer: a rate cut could serve as insurance if, say, the trade war worsened, or GDP growth slowed down (foreshadowing).
The FED ended up cutting rates by .25%. Markets tanked initially on the outlook that it may be the only time the FED cuts rates for a while. Additionally, some investors wanted a bigger rate cut and were disappointed. Stocks recouped their FED announcement losses the next day only to be pummeled again by… a worsening trade war and slower GDP growth.
Dirty August: Market Panic
Vix Today: +32%
Dow Today: – 800 points
On Thursday, Donald “Decepticon” Trump issued a 10% hike on tariffs on China. Markets fell off their record highs. China retaliated by letting the Yuan tank in value to stimulate exports.
“The less your currency is worth, the more you can export. “
China was probably thinking this
The president called out Xi Jinping for currency manipulation today. The administration hasn’t ruled out devaluing the US dollar as a countermeasure. Nobody is certain about what’s next, which is why everyone is selling. One thing’s for sure: the trade war is back on everyone’s mind and could reverse the economic outlook for H2 of 2019.
Fun Fact: Another trade war is brewing between South Korea and Japan. The two nations just removed each other from their preferential trade lists, which means it will become more expensive for the two nations to do business. The dispute goes back to disagreements over reparations for Japanese colonialism and related crimes from the early 20th century. Japan claims they already owned up to all of that stuff in a treaty from a long time ago. Sounds like some deep-rooted beef. And, like they say in Japan, beef is a dish best served hot!
The Big Picture: Is a Recession Coming?
The economy, what even is it? Here’s the lowdown. For simplicity, let’s say the economy is really just a sum of 4 parts: consumer spending, investments, exports/imports, and government spending.
Consumer Spending: It’s just people buying stuff. Consumer spending has been driving most of America’s GDP growth as of late. People are buying things!
Government Spending: Government spending is high as usual, and it contributes directly to GDP. While budget deficits can be scary, that’s a whole other can of worms that we’ll open later. At LIT, we can only take so many worm cans in a day before we get sick. 😦
Imports/Exports: If you export more than you import, the net exports contribute to GDP. On the surface, Trump initiated the trade war in an attempt to improve America’s export balance. Instead, that deficit has widened. This isn’t necessarily because US exports have become less competitive, but it has a lot to do with slowing economic growth abroad and a strong US dollar.
Investments: The concerning parts of GDP right now are business and residential investment. Think of business and residential investment as the money spent on new projects that drive the economy forward like a new neighborhood or a new office building (those are the most creative examples we could think of).
Business investment is the G in GDP because without it, the economy doesn’t grow in the long-run according to any classical economist. Unfortunately, investments aren’t doing so hot.
While most of the economy is consumer spending, the business cycle is primarily driven by investment, either in the business sector itself or in residential housing. Neither look good.
Bloomberg
What’s causing lower business investment? Uncertainty from the trade war has left companies unsure of what their next move should be. With supply chains this disrupted, investment is dwindling despite the lower tax rates passed in 2017.
We’ll stop here without speculating too much. Let’s face it, we can’t predict recessions and neither can you, but the GDP picture sure is looking a little consumer-dependent.
Oh yeah, we know there’s more to economics than GDP, but we wanted to give an easy breakdown for all you simpletons in the audience.
Next Week: Market updates plus some industry focused stories as we get back into full swing leading up to the new school year. Get ready for a riot!
Longhorn Investment Team 