Mullaney on the Markets

Focus Still on Trade and Fed

By Michael Mullaney

Director of Global Markets Research 

July 2019

Market activity in July was dominated by news on trade, Brexit, the European Central Bank and the Federal Reserve, with the S&P 500 “limping” to a finish of +1.44% for the month.

For much of July, the index reacted positively to the resumption of trade negotiations between China and the United States and a renewed pledge from ECB president Mario Draghi to reopen his economic stimulus toolkit. By the last week of the month, however, enthusiasm began to wane over new concerns about the potential for a “hard Brexit,” which stemmed from the demands of newly-elected U.K. Prime Minister Boris Johnson to scrap the Irish backstop clause from any potential agreement between the U.K. and the EU.

Closer to home, investors also appeared to be disappointed at the conclusion to the two-day meeting of the Fed’s FOMC Committee. While the Fed did cut rates by 25 basis points and ended the run-off of its balance sheet two months earlier than expected, Chairman Jerome Powell’s characterization of the cut as a “mid-cycle adjustment” — and “not the beginning of a long series of rate cuts” – effectively threw cold water on the move. Investors took this to mean that the rate cut, the first in 10 years, represented a “one and done” occurrence and would be too little to counteract the downside risks posed by tariffs, manufacturing malaise, tepid growth abroad and stubbornly low inflation.

Looking ahead, trade negotiations and the Fed should continue to drive sentiment in the markets. On the first day of August, for instance, President Trump announced that he intends to impose 10% tariff on $300 billion of (mostly consumer-related) goods that the U.S. imports from China, with an option of increasing the tax to 25%. The levy, scheduled to be enacted on September 1st, would come on top of the 25% tariff that has already been applied to $250 billion of Chinese goods. With China threatening to retaliate, it is safe to say that we have graduated from a “trade conflict” to a “trade war.” Manipulating currency levels has also been tossed into the equation by both countries as a tool to potentially offset the tariff impacts, which is a scary prospect for investors.

However, the Q2 earnings season is so far providing some optimism, as a majority of companies as of the first week of August had reported upside surprises to earnings estimates and offered evidence that consumers in the U.S. had rekindled their “spending spirits.”

Positive economic news could also emerge from the Economic Policy Symposium in Jackson Hole, Wyoming, towards the end of August, but it is unlikely to offset current geopolitical tensions around trade. Moreover, any additional help from the Fed will have to wait until the mid-September FOMC meeting.

In July, Communication Services nudged out Technology as the best performing sector on a total-return basis (+3.37% compared to +3.33%, respectively). Pulling up the rear was Energy, which fell by -1.78%, succumbing not to weakness in oil prices, but to a -2.1% drop in natural gas prices and the fear of a continued supply/demand imbalance. Health Care was the second weakest sector, falling by -1.59% during the month due to both pricing and political pressure. On a year-to-date basis Technology continues to dominate all other sectors with a return of +31.36%, while Health Care remains the laggard at +6.35%.

Globally, both developed and emerging market stocks lagged the returns generated in the U.S. markets during July. The MSCI EAFE Index returned +0.72% while the MSCI EM Index dropped by -0.90% in local currency terms. In U.S. dollar terms, both sets of returns were negative, -1.26% for EAFE and -1.14% for EM, as the broad trade-weighted dollar gained +0.78% during the month. On a year-to-date basis the S&P leads EAFE by +7.19% and EM by +10.74% in U.S. dollar terms.

Disclosure Statement: Boston Partners Global Investors, Inc. (“Boston Partners”) is an investment adviser registered with the SEC under the Investment Advisers Act of 1940. Registration does not imply a certain level of skill training. The views expressed in this commentary reflect those of the author as of the date of this commentary. Any such views are subject to change at any time based on market and other conditions and Boston Partners disclaims any responsibility to update such views. Past performance is not an indication of future results. Discussions of securities, market returns and trends are not intended to be a forecast of future events or returns. All figures are presented in USD unless otherwise noted.

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