by Connor Darrell CFA, Assistant Vice President – Head of Investments
Markets were largely unchanged last week as investors weighed mounting geopolitical concerns against the potential for an easing of monetary policy. Technology stocks were under pressure for a majority of the week as the ongoing trade dispute between the U.S. and China has hurt global microchip sales. 

Economic data released throughout the week did little to increase optimism that the global economy can stave off a slowdown in economic growth rates. Retail sales grew 0.5% month-over-month, slightly below the consensus forecast of 0.6%, and the University of Michigan Consumer Sentiment Index ticked down to 97.9 from May’s reading of 100. Elsewhere, a survey of businesses revealed a decrease in confidence among large multinational corporations; the fifth such decline in as many quarters. Most key metrics remain healthy in absolute terms, but the rate of change has certainly tilted lower in recent months.

Watching the Federal Reserve (Again)
Last week’s inflation data revealed a month-over-month increase in consumer prices of just 0.1%, a far cry from the Federal Reserve’s annual target. The Federal Reserve will meet this week to discuss monetary policy and markets will be paying close attention to the committee’s decision on interest rates, as well as its commentary on the economy. The bond market is continuing to price in expectations of forthcoming rate cuts, and the weakening in inflation expectations has only bolstered those expectations. The Federal Reserve has consistently communicated that its decisions are “data-dependent”, and the data has become increasingly difficult to interpret as a result of last year’s tax cuts and this year’s escalation in trade tensions. Ultimately however, investors should not concern themselves too much with the level of interest rates or the Fed’s next policy move. The fact that inflation remains so low is actually a positive sign that the economy has more room to expand, since inflation is often a key sign of tightening in the economy that precedes key inflection points in the economic cycle.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
A weaker than expected jobs report fed rising speculation that the Federal Reserve will opt to lower interest rates in the coming months, leading to a rally in equities that saw the S&P 500 rise by more than 4% last week. Global manufacturing data also released during the week seemed to lend further credence to this sentiment as trade tensions pushed global manufacturing activity into contraction and down to its lowest reading since October of 2012. It is becoming increasingly clear that the uncertainty related to global trade is having an impact on business investment, and with the tensions likely to persist in the near-term, investors should be prepared for additional volatility in markets. 

Don’t Rely on the “Powell Put”
With the sudden escalation of global geopolitical uncertainty threatening to slow business investment and reduce economic growth, Federal Reserve policymakers have found themselves in a very difficult (und unique) environment in which to operate. Perhaps in response to the very high levels of uncertainty coming from other areas of the financial world, it seems that Fed officials have made a concerted effort to be extra communicative in recent months. For example, during the last week of May (which included a market holiday), there were 13 separate speeches given by Fed officials; a staggering number when you consider that the Federal reserve already meets two times per quarter and releases detailed notes for public consumption after each meeting. It seems that the Federal Reserve has felt the need to address the shorter-term shocks to markets that have resulted from setbacks in trade negotiations and other geopolitical concerns by constantly reminding investors that it is watching things very closely. 

The timing of many of these statements has coincided with rising levels of volatility in markets, leading some to refer to current Fed policy as the “Powell Put.” With the Fed under the microscope, it is easy overestimate its power and lose focus on all of the other factors that drive markets over the long-term.  In the context of a $20 trillion economy, one or two 25-basis-point adjustments to short-term interest rates are unlikely to have a profound impact on the trajectory of economic growth, and investors would be well-served by broadening their focus. In fact, we would argue that the most important thing for investors to focus on is portfolio construction, and that this is the case no matter what stage of the economic cycle we find ourselves in. The interaction of monetary policy, the economy, and the stock market has become a defining characteristic of the current economic cycle, but it shouldn’t be the key input to determining the composition of one’s portfolio.