The outperformance of the first half of 2019 is a result of strong earnings seasons mostly limited by alternating reports of advancements and roadblocks in trade negotiations with China. At the midyear point, the street places a keen focus on the FED’s (likely) decisions to lower rates in efforts to prolong what has been the longest bull run in decades. But as a famous investor once said, ‘Bull market’s don’t die of old age, they die of fundamental problems…’

Traditional economics suggest inflation and unemployment have an inverse relationship, as FED Chairmain Powell confirmed at last week’s congressional hearing. Chairman Powell also concurred with a Senator’s theory that such a relationship is less closely correlated in today’s modern economy, as inflation has yet to materialize in a country with record low unemployment. The conclusion is thus that low inflation and low unemployment can coexist (time will tell if the paradigm has truly shifted here). Powell cited slowing global growth and the trade war as developments that trouble American businesses, and theorized that a lower FED rate can provide cheap capital to indirectly aid firms in such market conditions.

While I don’t envision any negative consequences of marginal rate cuts, FED decision guided by facets of government policy (i.e. trade talks) and not monetary policy is concerning. Perhaps the institution is dipping its toes into waters that should be navigated by the White House. Should the Trump administration walk its talk and finalize a deal with China, cheap money could overheat the markets even more. Forecasting this scenario, the FED would have little power to stimulate a struggling economy with rates already as low as they could become. Perhaps Trump’s twitter hostility towards Powell is his plan B to foster growth, while plan A has yet to come to fruition as trade negotiations with China have proven fruitless thus far.

Some investors wonder whether Trump’s trade war is really warranted. When Trump claims that America has been taken advantage of, what does that really mean? Sure the U.S. could benefit from more attractive pricing of raw goods, but the essence of his claim concerns intellectual property. For an American business to sell goods in China, they must form joint-ventures with businesses domiciled there. This leaves them particularly vulnerable to intellectual property theft. The degree to which American businesses have been compromised in this regard is difficult to determine, but Trump’s concern is legitimate and a key topic that a revised deal would aim to address.

My focuses for the second half of 2019:

• What is the pace/degree to which the FED will cut rates? Will the street be satisfied by a 25 basis point cut later this month? And what specifics will guide Powell’s decision to do so?
• Technology stocks in particular have executed phenomenally well on revenue and earnings growth. Can this remarkable performance continue and drive the economy further upwards? A key driver here will be consumer spending and the ability for these firms to maintain strong margins.
• How much will global growth slow? Since fundamentals remain strong domestically, factors abroad could be the catalyst that impacts us at home.

Image credit to the New York Post

PLEASE NOTE: EDWARD C. MCCANN DOES NOT BEAR ANY RESPONSIBILITY OR LIABILITY WITH RESPECT TO RESEARCH MADE AVAILABLE. INVESTORS SHOULD UNDERSTAND THAT THEY ASSUME FULL RESPONSIBILITY FOR ANY TRADING DECISIONS THEY MAKE BASED UPON THIRD-PARTY RATINGS OR REPORTS.

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