The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Global equities ended the week modestly lower after recouping some of Monday’s sharp losses. A re-escalation of trade tensions dominated the attention of markets for most of the week, as China allowed its currency to decline to its lowest level against the dollar in over a decade. The move has been widely viewed as a response to President Trump’s announcement of a new round of tariffs (a weaker currency makes Chinese goods more affordable for foreign buyers) scheduled to go into effect in September. Bond yields continued their downward trend as the equity market volatility led investors to seek the relative safety of U.S. Treasuries, which still offer attractive yields in comparison to those available in much of the developed world. In many places around the world, bond investors are faced with negative yields.  At present, a record $15 trillion of bonds around the world now carry negative interest rates.

How Do Currency Valuations Affect Investors?
The sudden decline in the value of the Chinese Yuan that followed President Trump’s announcement of a new round of tariffs led many in the administration to label China a “currency manipulator,” a term which was not being used to describe Chinese economic policy for the first time. The rising tensions have increased market volatility and altered the market’s perception of risk, causing safe haven assets such as U.S. Treasuries to rally further.

We often think of our portfolios as being comprised of stocks and bonds, and rarely do we have direct positions in foreign currencies, but it is important for long-term investors to understand how exchange rates fit into the bigger picture.  In general, foreign exchange rates are a byproduct of the economic backdrop. All else equal, a country with a healthier economy, higher interest rates, and a stronger balance sheet will have a more valuable currency. This is why we have seen the dollar continue to appreciate throughout much of the last several years. The flip side of the coin for large multi-national corporations is that a stronger dollar may weaken reported sales and earnings because its products become more expensive to foreign customers. This is part of the reason we have seen a tapering of earnings growth for U.S. companies during recent quarters. 

The strength of the dollar may continue to cause headwinds for large multi-national corporations, but in general, it is a representation of the relative strength of the U.S. economy and should not be overly concerning for investors. The more challenging phenomenon for many investors who may require income generation from their portfolios is that the recent moves have led to increased volatility in markets and have pushed bond yields even lower. In a low-yield environment, it can be tempting for bond investors to seek out more risky assets such as high-yield bonds and the debt of governments located in emerging markets. However, despite their more attractive yields, these investments offer much less protection during market downturns. It will be important for many investors to avoid the temptation to load up on these types of investments and to maintain a healthy allocation to core, high quality bonds due to their ability to provide a counterbalancing effect to equity risks within a diversified global portfolio.

Valley National News

Congratulations to 5 team members who have been promoted, in recognition of their hard work and contributions to our client-first culture.

Ryan Mulhearn, CIMA® and Michael Warch to Associate Financial Advisor, and Nico Wolfgang was promoted to Senior Associate. READ MORE

Elizabeth Wilson, CPA was promoted to Vice President, Finance & Tax Services, and Judianne Harris was promoted to Chief Marketing Officer. READ MORE

Elizabeth Wilson, CPA has been selected as the Rising Star Award recipient by Lehigh Valley Business as part of the 2019 CFO of the Year Awards. READ MORE

The Numbers & “Heat Map”

Sources: Index Returns: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends. Interest Rates: Federal Reserve, Freddie Mac

The health of the US economy is a key driver of long-term returns in the stock market. Below, we grade 5 key economic conditions that we believe are of particular importance to investors.



Our consumer spending grade remains an A. Surveys of US consumers continue to indicate that the consumer is in a strong position, and recent GDP data provided further evidence of healthy consumer spending.



Our Fed Policies grade remains a B+ after the Federal Reserve opted to cut its interest rate target by 25 bps following last week’s meeting. The cut was widely anticipated by markets, and if history is any representation, it is unlikely to be the last.



With 77% of S&P 500 companies having reported earnings as of August 2, the EPS growth rate for the second quarter is -1%. If that number holds up, we will have observed two consecutive quarters of year-over-year earnings declines for the first time since 2016.



The US economy added 224,000 new jobs in June, beating consensus estimates by a wide margin. We continue to view the jobs market as very healthy.



Inflation is often a sign of “tightening” in the economy, and can be a signal that growth is peaking. The inflation rate remains benign at this time, but as the economic cycle continues to mature, this metric will deserve our ongoing attention.




On a 10 point scale, we currently assess the “international risks” to markets as a 6. The key areas of focus for markets remain US/China trade relations, the ongoing Brexit negotiations, and escalating tensions in the Middle East.

The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.

Did You Know…?

People with a financial adviser say they aren’t just better with money – they’re happier with life overall. We think so, of course, but don’t take our word for it… read (and share) this Business Insider article covering the results of a Northwestern Mutual survey. READ MORE

Have you met all of our Financial Advisors? Get to know some of the senior professionals on our team:

The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
As was widely anticipated by markets, the Federal Reserve opted to reduce its target interest rate by 0.25% last week. However, the dovish pivot was not enough to support equity markets, which ended the week in a downswing following a series of tweets from President Trump which indicated he was moving forward with an additional round of tariffs on Chinese goods. That this announcement came just one day after the Federal Reserve’s interest rate decision is likely no coincidence, as the Fed’s accommodative stance will provide the President with greater confidence that the economy can withstand the consequences of upping the ante with the Chinese.

With the confirmation that interest rates would slide downward and the increase in equity volatility stemming from President Trump’s tariff announcement, the bond market managed a small rally last week. The Barclays Aggregate Bond Index is now in the midst of one of its strongest years since 2011. 

Global Manufacturing in Contraction
Purchasing Managers’ Indices (which utilize survey data to evaluate business confidence and manufacturing activity) released last week revealed that global manufacturing activity remains challenged by the uncertainties posed by the U.S.-China trade dispute and Brexit negotiations. The U.S. PMI remains the only major region that has held above 50 (a critical level which separates expansion and contraction), though it has declined materially over the last several quarters. PMIs in the eurozone, Japan, and China all remained below 50 last month, indicating that these manufacturing markets are in contraction. 

Manufacturing is far more cyclical than top line economic growth, but the reduction in global manufacturing activity that we have observed over the past year is a symptom of the toll that mounting geopolitical uncertainties are having on business decisions. If businesses’ reluctance to invest in production permeates into hiring decisions, it could begin to impact labor markets and accelerate the arrival of the next recession. Given the relative health of the U.S. economy and the potential for these uncertainties to be lifted by a simple handshake between Presidents Trump and Xi, this scenario looks a long way from playing out.  But for investors who have achieved double digit returns in a year where the economic backdrop has continued to weaken, this type of data should not be ignored and may represent a reminder of the prudence of maintaining discipline and avoiding the urge to chase returns during late cycle investing.

VNFA In The Commnity

Our VNFA team is “gearing up” for another Community Bike Works SPIN-A-THON fundraiser. Teams of 4-8 riders will raise a minimum of $1,000 and tag-team cycle for 3 hours at LVHN Fitness on September 28. Learn more about the cause and how to participate or lend support at Community Bike Works’ crowdrise web page.

VNFA is one of the nominees for the 2019 Lehigh Valley Business Reader Rankings Award in the category of Wealth Management. If you feel we are worthy, click here to vote. Plus, check out all the other worthy LV businesses in each category.