July 2019 Market Commentary

The month of July offered investors a little bit of everything, including new all-time highs for equity indexes and a month-end selloff inspired by the first rate cut from the Federal Reserve in over a decade. The S&P 500 gained +1.4% in July on its way to surpassing the 3,000 level for the first time in history. The index has advanced +20.2% year-to-date. Gains were moderated on the last day of the month as markets digested Fed Chairman Jerome Powell’s language around a quarter point cut in its benchmark interest rate. Powell positioned the move as a “mid-cycle adjustment to policy” rather than the beginning of a long series of rate cuts, with the goal of heading off any potential recessionary pressures.

While the domestic economy appears to be growing at a healthy clip, threats continue to lurk in the background in the form of trade and geopolitical tensions. Overseas markets fell by -1.2% in July per the MSCI ACWI ex-US Index, with Moody’s stating that the risk of a “no-deal Brexit”, widely seen as a negative outcome for markets, has increased following Boris Johnson’s election as UK Prime Minster. Elsewhere, perceived safe-haven investments benefited from falling interest rates and increased uncertainty. Bonds advanced +0.2% on the month for a +6.4% YTD gain per the Barclays US Aggregate Bond Index, while gold prices rose +1.3% MTD for a gain of +11.6% on the year.

With so many variables at play both at home and abroad, we filter all the news and noise through our “Three Dials” investment framework. As summarized below, we had no changes in any of our three primary indicators during the month:                                                                                    

1. Market Sentiment and Momentum: Positive

Even amidst the post-Fed selloff, buyers appeared willing to step in and provide support to falling markets. While the second half of the year is unlikely to see gains equal to those of the first half, our Momentum Indicator remains in a Bullish position for the time being.

2. Economic Fundamentals: Positive

The first look at Q2 GDP in the US shows that the economy grew at a +2.1% annualized rate, below the recent trend but still above economist projections for the quarter thanks to a strong +4.3% rise in consumer spending. Meanwhile, the IMF updated its 2019 global growth forecast to +3.2%, down slightly from its previous estimate.  While neither report indicates torrid growth ahead, loose financial conditions worldwide should continue to support a Pro-Growth outlook for our Fundamental Dial.

3. Valuation: Negative

We still view stock valuations as historically expensive, which has caused us to moderate our overall risk positioning. For instance, the oft-cited “Buffet Indicator”, which compares stock market capitalization to GDP, shows that valuations have crept back to levels not seen since the dot-com bubble at the turn of the 21^st century. While stocks, particularly those in the US, appear to be the most attractive investment option for the time being, our Valuation Dial remains in a Negative position through the end of July.

On a composite basis, our “Three Dials” paint a cautiously optimistic picture of the investment landscape.

Sources:

[1] https://www.bloomberg.com/news/articles/2019-07-31/fed-cuts-rates-by-quarter-point-and-signals-potential-for-more

[2] https://www.moodys.com/research/Moodys-Risk-of-no-deal-Brexit-has-increased--PBC_1186789

[3] https://www.cnbc.com/2019/07/26/us-gdp-second-quarter-2019.html

[4] https://www.imf.org/en/Publications/WEO/Issues/2019/07/18/WEOupdateJuly2019