Fed Cuts Rates for Second Time in 2019

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For the second time in 2019, the Fed cut its benchmark rate by 0.25% to a range of 1.75% – 2.00%. This was the expected move as the Fed hopes lower rates will help prolong the current economic expansion in the face of ongoing trade tensions and slowing global growth. Chairman Jerome Powell stuck closely to his script during the press conference following the decision, giving little information about potential future moves. Fed officials are split about what to do going forward, with seven of the 17 members projecting another rate cut and the other 10 maintaining rates should not be cut further.

As US investors were largely focused on the Fed decision, an attack on a key Saudi Arabian oil facility caused the largest oil supply disruption in history. The attack knocked out approximately 5% of global oil production. This caused oil prices to spike almost 15% higher on Monday. While remaining volatile, oil prices moderated through the remainder of the week as Saudi Arabia gave assurance it would repair the damages relatively quickly. Oil prices finished the week up 5.91%, well off the highs of Monday.

Snapping a three-week winning streak, the S&P 500 failed to set a new all-time-high after moving within 1% of the level reached in July. A relatively strong economy and easy monetary policy have helped support markets so far in 2019, but geopolitical uncertainties and slowing global growth remain headwinds. Regardless of market conditions, it is important to stay committed to a plan and maintain a diversified portfolio consistent with your goals and risk tolerance. It can be tempting to make knee-jerk decisions based on news headlines, but sticking to a consistent strategy provides a better probability success in the long-run.

 

Chart of the Week

Following a series of rate hikes that began in late-2015, the Fed has reversed course and cut rates twice in as many months. There were the first two rate cuts since the 2008 financial crisis. Investors will be watching geopolitical risks (such as the US-China trade war) and global growth (specifically in Europe) in attempt to gauge the need for further rate cuts.

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*Chart source: Trading Economics

 

Market Update

Equities

Broad equity markets finished the week negative as trade tensions slightly increased and the Fed decision had little impact on market prices.

S&P sectors were mixed, with utilities and real estate leading the pack with 2.19% and 2.06% gains respectively. Technology continues to lead the S&P sectors YTD with 29.59% growth.

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Commodities

Commodities increased during the week as oil rose 5.91%. While demand levels remained relatively consistent, an attack on a Saudi Arabian facility resulted in a large supply shock. This sent oil prices sharply higher before moderating throughout the rest of the week. Geopolitical risks will likely continue to play a role in the near-term as investors watch to see how quickly Saudi Arabia can normalize its supply line.

Gold prices increased by 1.04%, snapping a three-week losing streak. Prices were supported by lower rates in the US as well as increasing uncertainties surrounding the US-China trade war. Prices were able to bounce off the important $1,500 threshold, finding support from investors.

Bonds

The 10-year Treasury yield fell from 1.90% to 1.74% resulting in positive performance for traditional US bond classes. Yields dipped on increasing geopolitical risks and ongoing trade uncertainties. However, the 10-2 year yield curve remained positive as the Fed cut its benchmark rate. Investors will continue to closely monitor the relationship between these important yield levels.

High-yield bonds increased slightly over the week as credit spreads continued to tighten. High-yield bonds are likely to remain attractive in the long term as the Fed has adopted a dovish stance and is expected to continue to lower rates, likely helping current bonds longer term prospects.

 

Asset class indices are positive so far in 2019, with large-cap US stocks leading the way and bonds lagging.

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Lesson to be Learned

It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong”

– George Soros

As investors, it can be easy to focus on the gains in our portfolios because they are more exiting to talk about. However, oftentimes it is even more important to stay focused on the losses, and to make sure you have a strategy in place to prevent catastrophic losses. By building a financial plan and sticking to a disciplined investment strategy, you can minimize the negative impact emotions can have on your portfolio. While this is not as fun to talk about, it can improve your chances for long-term investment success.

 

Indicators

Our investment team has two simple indicators we share that help you see how the economy is doing (we call this the Recession Probability Index, or RPI), as well as if the US Stock Market is strong (bull) or weak (bear).

In a nutshell, we want the RPI to be low on the scale of 1 to 100.  For the US Equity Bull/Bear indicator, we want it to read least 66.67% bullish. When those two things occur, our research shows market performance is strongest and least volatile.

The Recession Probability Index (RPI) has a current reading of 29.82, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 100% bullish – 0% bearish, meaning the indicator shows there is a slightly higher than average likelihood of stock market increases in the near term (within the next 18 months).

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