We have been focused on two primary drivers for US markets in 2019: trade negotiations and the Federal Reserve’s monetary policy decisions.

On Wednesday, July 31st, the Federal Reserve cut interest rates by 0.25%. In his press conference, Fed Chair Jerome Powell noted trade policy’s impact on their decision to ease:

“After simmering early in the year, trade policy tensions nearly boiled over in May and June, but now appear to have returned to a simmer. Looking through this variability, our business contacts tell us that the ongoing uncertainty is making some companies more cautious about their capital spending.”

Chair Powell also characterized this action as a “midcycle adjustment to policy”, rather than the start of a long series of rate cuts. Bond markets, however, were pricing in 2-3 additional cuts in 2019.

On Thursday, August 1st, President Trump announced a new round of tariffs on Chinese imports. The US imports roughly $550bn from China. A 25% tariff rate applies to about $250bn already. The new tariff rate would be 10%, would apply to the remaining $300bn in imports, and would begin September 1st.

Over the weekend, China responded by allowing its currency, the Yuan, to weaken against the US Dollar, which offsets some of the impact of tariffs. Reports also state that the Chinese government is directing state-run enterprises to suspend imports of US agricultural products.

The market response this morning has been a flight to safety, into US bonds, the Yen, and gold. Bond market investors are increasing their projections for future Fed rate cuts.

Asset Price Return
US Stocks 2,898 -1.2%
10 Year Treasury 1.77% 0.7%
Emerging Market Stocks 1,004 -2.0%
Gold 1,463 1.5%
Yen 106.1 0.4%

Looking forward, we continue to believe that the first-order impacts of tariffs are manageable. However, we agree with the Fed that if uncertainty weighs on business investment, as it appeared to do Q2 US GDP numbers, recession risks will rise.

Trade talks will continue in early September. In the meantime, we will turn our attention to indicators of business and consumer sentiment in the US. The talks have the potential to serve as a catalyst, positive or negative, for returns in the second half of the year.

We remind investors that maintaining discipline during periods of uncertainty and market volatility is the most reliable course for growing and preserving wealth over the long-term.  We will continue to monitor and evaluate developments between the U.S. and China.  As the situation unfolds, we will be here to respond and communicate our views. Please contact any member of our team if you have questions.