A July Overview
The last twelve months in the capital market have been interesting, to say the least. In the fourth quarter of last year, we experienced what can only be described as a “flash” bear market. Then, at the start of 2019, we experienced one of the fastest recoveries in our history. That being the case, we find ourselves at a crossroad, with several crosscurrents in our sights. There are several themes we are closely following as we move forward.
First, there is no doubt that the run we have experienced in the equity markets this year has been driven by a strong economy and exceptional corporate earnings. Moreover, the US economy has been standing alone as the rest of the global economies continue to flounder. This run in corporate success has been welcomed. However, we find ourselves wondering if this economic run can continue in its current state as the effects of the 2018 corporate tax cut are probably fully “baked into the pie”. From everything we see, we believe the US economy will slow quite a bit in the second half of the year. We have experienced 2.5-3% growth to this point in the year, but believe it will decelerate to around 1.5% in the second half of the year. Ultimately, this will be a lull in growth, not an actual downturn to recession.
Additionally, FED Chairman Powell has framed the case for more accommodative policy as insurance against the “crosscurrents” of weaker global growth and policy uncertainty, most notably over the trade negotiations with China. Even then, however, those risks have arguably moderated in recent weeks. The real questions will be whether the FED is doing enough to combat the global softness and whether the global economies will turn back up and keep the FED at bay.
We have had a great run in both the equity and bond markets this year. In no way are we expecting the US to slip into recession in the coming couple of quarters. However, the markets are priced to perfection and we see the second half economic slowdown as a potential pothole for investors. For that reason, we have begun raising our cash levels a bit. Prudence being the better part of valor, we feel like having a bit more dry powder makes sense in this time frame.