- Investments are delivering productive returns this year
- Persistent volatility is likely to continue
- A second U.S. interest rate reduction is anticipated this fall with the prospect of further rate reductions to follow, depending on economic data.
- Despite outstanding geopolitical concerns, the U.S. economy remains resilient, abetted by a central bank policy oriented toward sustaining the economic expansion.
- We currently remain defensive in our stock allocations, yet are cautiously optimistic the slowing economy will stabilize.
The last 18 months have been a roller coaster ride for investors, even though stocks and bonds have delivered strong returns this year. With interest rates around the world declining, the financial markets have been mostly ignoring the increasing number of signs our global and U. S. economies are slowing. The volatility that initially reappeared in 2018, then in early May of this year, and now again within the last two weeks, is increasingly looking like a precursor for more in the future. Although we feel the global economic expansion can continue, our business cycle appears to be in the later stages. Investing is likely to become more challenging from here.
Interest Rate Cuts
While our U.S. Federal Reserve Bank recently cut interest rates as expected, their comment afterward disappointed investors when Jerome Powell suggested this “mid-cycle adjustment” was not the beginning of an extended plan to significantly reduce rates. We anticipate our central bank will lower rates further this fall and then pause for a while, until they receive more clarity on the health of the U. S. economy. President Trump’s initial announcement of another 10% tariff on $300 billion of Chinese imports, comes on top of the $250 billion of goods that already face a 25% tariff. Trade war uncertainty now looks like it will remain for an extended period. Although we still believe a trade agreement with China is reached, it is increasingly unlikely this happens any time soon and perhaps not until the summer of 2020, at the earliest. Geopolitical uncertainty around Chinese Trade Negotiations and Brexit will certainly continue and remain a concern for investors focused on slowing economic growth.
Even though our U. S. economy’s overall pace of growth has slowed, it fortunately remains on relatively solid footing with low unemployment and high levels of consumer sentiment and spending. Our central bank just demonstrated a willingness to do what is necessary to continue the expansion.
Meanwhile, Pacific Wealth Management believes it is prudent to remain defensive with “underweight” stock allocations. Bond and gold investments are also earning productive returns this year while providing an effective buffer to the financial market volatility. We are cautiously optimistic the slowing economy will stabilize with Central Banks around the world now encouraging growth and trade uncertainties, ultimately, resolved. Our well diversified investment portfolios are built on a solid foundation and centered upon a wealth preservation bias.
James C. Kuntz, CIMA®