Stocks started the day modestly higher ahead of a very important speech given by Federal Reserve chairman Jerome Powell. Powell is in Jackson Hole, WY along with other central bankers who gather there every year to exchange ideas. Many important announcements over the years have come during this event, so investors were on “pins and needles” wondering if the Chairman might offer some insight into what to expect at next month’s Fed meeting.
Stocks lifted a bit following the release of Powell’s comments as they hinted at the possibility of further rate cuts. Stocks then turned steeply lower following a string of Tweets by President Trump suggesting he was upset by Powell’s comments. Additionally, the Chinese government announced retaliatory tariffs against the U.S. The timing of these tariffs was not doubt selected to inflict the greatest “pain”. Given the fast-flowing comments coming from the White House and any number of other sources, investors are heading to the sidelines ahead of the weekend.
A Friday selloff in August is not a rare occurrence. The seasonal weakness found in August and September sets the stage for investors wanting to avoid being caught wrong-footed in the event something surprising happens over the weekend. So, with the volume of comments released on a Friday in the middle of this seasonally weak period, it is far from surprising that stocks are selling off.
We do not deliver political commentary or take any kind of partisan position when it comes to investing our clients portfolios. However, we do pay attention to market responses to political events. Whenever emotion or political bickering is the driving force behind market moves, we believe it presents opportunities. This period is no exception.
To help us remain focused and calm during periods such as this, we remind ourselves of the following: The Federal Reserve’s actions are ultimately more important than any speech delivered by the Fed chairman. The actions of Congress and the White House are ultimately more important than any Tweet or soundbite. The profitability of American companies is ultimately more important than any forecast or commentary on the future. The financial health of American consumers is ultimately more important than any anecdote about consumer sentiment.
To wit, the Fed has switched from a tightening (higher rates) bias to an easing (lower rates) bias (this is good); Congress has passed no significant economic legislation this year (this is good); despite White House rhetoric, the last move by the President was to push back tariffs that had been promised (this is good); and almost every piece of economic data related to the American consumer indicates they are spending and saving in sustainable ways (this is good).
So, we see limited evidence of a recession on the horizon. Fact is, in my 28-year professional career, I have never witnessed a greater disparity between economic rhetoric (negative) and the underlying fundamentals (good) and this includes 2007. Does this mean a recession cannot happen in the next 18 months? No. However, the data does suggest that there is plenty of runway ahead of us before a significant fear of recession should be the focus of investors.
If the weekend comes and goes with little or no further “negative” economic news, we expect the market to regain its footing and head higher…at least initially. Keep in mind we are amid what is historically the weakest 2 months for the market. This is the time of year when it is best to hold one’s breath rather than run for the hills.
The stock market has had ample reason to sell off in far more dramatic fashion than we have seen lately. The underpinnings of the economy remain strong and the Fed remains weak (accommodating). These are the two most important factors influencing stocks. That stocks have not fallen on the heals of all the rhetoric, to us, bodes well for investors over the weeks and months ahead.
Here is our final thought. While it may not have started out as a trade war, it certainly is one now. The U.S. has never engaged in such a “war” exactly. Yet, this is true of every “war” in which we have fought, including the Cold War. What makes this one unique? How should we view it? What is our objective in this “war”? These are important questions to answer as is always the case.
To help frame the way in which we think of this “war” we suggest that clients view it as they would a combination of the rhetoric that defined the Vietnam War and the maneuvering that defined the Cold War. This means to expect a lot of evening news reports and philosophical debate surrounding how the “war” is being waged just as we saw during the war in Vietnam. Likewise, as we saw during the Cold War, there will be no battlefields or casualty counts. Instead, we will see diplomatic flare-ups and political posturing in abundance.
Importantly, like every “war” that has come before, there will be an economic boom that comes with the “peace.” We are in the early stages of a 17-year economic boom that we believe will lift the Dow Jones Industrial Average to levels that sound ridiculous to mention now. The growth ahead will match or exceed what this country experienced following the depths of the Great Depression and the World War that ensued.
Whether you believe China has been getting away with economic “murder” or whether you believe President Trump is wrecking the economy, we find ourselves right here, right now and our responsibility is to navigate your portfolio as best we can. Our advice to clients is to remain calm as this storm will pass. The Fed is likely to lower rates next month (and maybe in October) and we anticipate the tariff rhetoric will go away and higher stock prices will follow. Regardless, we remain diligent and determined to deliver results for our clients.
Kessler Investment Group, LLC