Vigilare Wealth Management Q2 2019 Commentary
By Jason@vigilarewealth.com on July 5, 2019 in Investor Lounge
This second quarter of 2019 can be summed up as the “Tweet” quarter. The headline (tweet) risk reached a crescendo in the month of May with the stock market losing 7%. Shockingly, that month drew outflows of over $20 billion from equity ETF funds. This was a new record of outflows for a one‐month period! Markets recovered May losses in June to end the first half of the year with strong gains.
If the second quarter of 2019 was the “Tweet” quarter, then this next quarter will be the known as the “Fed” quarter. All eyes are on the Federal Reserve’s (Fed) sudden change of heart regarding rate policy. It was only six months ago that the Fed was projecting two rate hikes in 2019 and another pair in 2020. Fast forward to today and the consensus is for one to three rate cuts over the next year, with the first coming as soon as July. We “sniffed” out this reversal of policy in early January and mentioned it in our earlier commentary.
Conventional wisdom says the Fed lowering rates is correlated with easing financial conditions which leads to: weakening dollar, steepening yield curve, flattening credit spreads, rising equity prices, and falling volatility (hint – all good stuff). The big caveat is when the economic fragility is so overwhelming that lowering rates comes too little too late. The years of 2001 and 2007 were examples of when the Fed began to lower rates, yet the economy slipped into recession.
Our baseline scenario is that the current environment is more similar to 1995. In this period the Fed surprisingly lowered rates after having quickly raised them from 3% to 6%. The Fed called that rate cut an “Insurance” cut and our view is the Fed will use the same reasoning this time around. The argument will be that the pick‐up in productivity growth can allow for an economy to experience growth while at the same time containing inflation risks. The Fed will point to slowing U.S. data of late and persistently stagnant global growth as further reasons. We believe that the Fed may use the same language and refer to the new cuts as “Insurance” cuts.
As a side note, we are moving closer to the general election and thought it would be interesting to highlight market returns and presidential cycles. There is no single predictor of markets so please take this lightly and with a few grains of salt. If you break down the presidential cycle into 8 years (Term 1, years 1‐4; and Term 2, years 1‐4) the two best market return years have been Term 1 – Year 3 and Term 2 ‐ Year 2.
Conversely, the two worst years have been Term 1 – Year 2 and Term 2 – Year 4. These are the only two years where the average return is negative, and market is down over 50% of the time. This data goes back to 1900‐2015. We will discuss in more detail as we get closer to next November.
Regardless of the Fed’s policy shift, we need to be as vigilant as ever with markets reaching new highs. Our focus and attention will be on scrutinizing economic and market data which we believe would precede an economic slowdown, and ultimately a recession.
Trade/protectionism continues to be a major risk that can lead to economic fragility, lack of confidence, and recession. These would all be reasons to reevaluate our baseline case and reduce risk.
Thank you for your Trust.
The Vigilare Wealth Management Team
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