Federal Rate Cut, short term positive and long term negative?
July saw modest gains in the US which still lead the global equity markets in performance. Canada was flat and Asia was slightly negative. Gold has been one of the top performing asset classes year-to-date.
The much anticipated event in July has been the Fed’s interest rate decision. The Federal Reserve has pivoted from balance sheet tightening to potential for more Quantitative Easing. The latest decision was to cut the benchmark interest rate by 0.25%. The immediate effect of lower interest rate is a boost to the net present value of all asset classes which is good for the financial markets. Longer term wise, the Fed is risking its credibility as an independent entity to provide stability to the financial system. I perceive the rise in gold price as a sign of central banks losing credibility in a world of sustainably low to negative real interest rates.
Economic indicators have shown a synchronized slowdown in growth. However, with the global central banks backstopping capital values and corporate earnings grinding out modest growth, it is difficult to turn too bearish on Equities.
Earnings Update
Earnings season remains in full swing. Over 55% of the S&P500’s market cap have reported Q2 results so far and roughly 20% in Canada.
For U.S. companies that have posted financial results, profits are beating by 5.6%, with 71% of companies exceeding their bottom-line estimates. Q2 expectations are for revenues growth of 1.8% and earnings growth of 1.9%.
For TSX, second quarter earnings are expected to increase 3.4% from Q2 2018. While still early days in the reporting season, 58% of the companies have reported Q2 earnings above analyst expectations.
RBC Wealth Management U.S. economic indicator scorecard
US Debt Ceiling
July saw an unusual bipartisan accomplishment when Treasury Secretary Mnuchin successfully negotiated a budget agreement with Speaker Pelosi and delivered the support of the President. The deal achieved two important public policy goals. First, it suspended the debt ceiling until after the 2020 elections hence removing the threat of a US government default. Secondly it increased the spending caps created by the Budget Control Act of 2011.
The US Treasury department pegs the US national debt at $22.03 trillion as of Jun 19, 2019. The federal debt-to-GDP ratio is projected by the Congressional Budget Office to grow from 78% of GDP in 2019 to 92% in 2029 – the largest share since 1947.
What does this mean for the future of Fed decision making and the strength of US dollar?
US -China Trade Talks
After weeks of no direct face to face trade negotiations between Beijin and Washington, Secretary Mnuchin and Trade Rep Lighthizer head to China for a new round of talks. Expectation for an agreement to be announced at the end of the meetings are low.
There may be progress on the two specific issues both sides need some progress on. President Trump needs a major pickup of agricultural orders from China, and the China needs Washington to give some waivers for US companies to sell to China tech giant Huawei.
Democratic Debates
Mehlman Castagnetti Rosen & Thomas, a Washington, D.C. based political consulting firm, released its latest quarterly deck on the upcoming 2020 US presidential elections. Below are some of the key highlights from the presentation:
- While the margins have narrowed, Joe Biden remains the frontrunner in a crowded Democratic field and holds a solid edge in head to head polls versus Trump
- The latest poll numbers suggest Trump and Republicans are confronting a “marginalization problem” where the net preference for the GOP has declined drastically amongst women, 18-34 year olds, white college graduates and non-white voters.
- Year to date, Trump has raised more money than all democrats and outspent Top 3 democrats combined on Facebook ads in Key States, FL, OH, AZ, MI, PA, WI and VA
The divide between Republican and Democrat policymakers have never been greater. Democrats want to see social reforms that benefit the “mainstreet” Americans while Republicans want to double down on capitalism ideals to safeguard the US economic dominance.
Rita Li works with high net worth individuals and families to provide tailored investment advisory service and wealth management planning. Her team comprises of professionals with in-depth taxation and legal expertise, together, they deliver a high standard of service to clients. Rita is a Chartered Financial Analyst CFA® and Certified Financial Planner CFP® with experiences at top ranked investment firms in Canada and HongKong. Rita has her MBA from Richard Ivey School of Business.
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