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Market and Economic Confusion Abounds

CAMS Weekly View from the Corner – Week ending 8/9/2019

August 12, 2019

The summer rally of 2019 has been thrown into question after the most recent Federal Reserve meeting.  They followed through with the expected interest rate reduction but halted the developed narrative that this would also be the beginning of an on-going interest rate cutting cycle.

The summer rally was built on the collective foundation that interest rate cuts – as in plural – would be coming for the foreseeable future.  FED Chairman Powell informed us this would not be the case and the market immediately went into volatility mode with instant downside.

Post Federal Reserve comments our central focus has been if market participants will retract the entire summer rally having been built on the expectation of on-going cuts.  Would taking away the expected cuts lead to market participants taking away the rally they had created?  The verdict is very much out on this currently.

Interestingly, the ensuing volatility after Chairman Powell’s statement was quick and fierce – to the tune of nearly a couple thousand Dow Jones Industrial points – which has led to a new developing narrative that more interest rate cuts may be coming.

In other words, market participants offering the ole – “The FED probably doesn’t mean it”.

What if they do?

If they do then more volatility, as summer turns to fall, will most likely be in the cards.

We have offered through the summer season the economy is anything but crashing lower.  In fact, yet again, this past Thursday the Weekly Unemployment Claims continued to point to multi-decade lows.

This measure is a quick litmus test for the employment landscape.  Historically these Claims help point to economic issues are coming when the U.S. economy begins to weaken.  These Claims are historically low meaning the employment landscape remains healthy and solid.

Said landscape is not exactly an interest rate cutting backdrop.

Our historically highly valued markets need solid and consistent economic growth to support them.  This lays a backdrop for companies to increase their sales and profits and through this market participants bid up their values with the increased profits they are generating.

If the economy slows but remains healthy enough for the FED to remain off the interest rate cutting cycle then it could get dicey through the markets.  Too much growth to cut rates consistently and yet not enough for companies to increase profits at a rate that a highly valued market needs to keep it elevated.

This is a developing scenario that may not play well with market participants.

The next few months offer a potential landscape that may be quite interesting if not challenging.  The summer season offered a quiet and consistent uptrend in markets.  Absent interest rate cuts it appears the fall season may be setting up to be less quiet and more volatile.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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