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.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Markets slid lower last week as concerns over trade policy remained top of mind for investors. On Thursday, President Trump announced that the United States would begin assessing a 5% tariff on all U.S. imports from Mexico unless the Mexican government began taking a more active role in reducing the flow of Central American migrants seeking asylum in the United States. The news pushed markets into “risk-off” mode and stoked concerns that major North American supply chains could be materially disrupted. The U.S. 10-year treasury reached its lowest level since September of 2017, which resulted in a deeper inversion of the yield curve and a strong week for bonds. 

Watching the Economic Data
Amid all of the uncertainty permeating through markets regarding trade policy and its eventual impact on global economic growth, the Fed has continued to express its intention to remain “data dependent.” This week, markets and policymakers will have access to updated PMI manufacturing data, which has been trending lower for several months. Friday will also bring the monthly jobs report, which has been consistently strong. Overall, while economic data releases have been overshadowed by trade negotiations in terms of news coverage, they are arguably just as (if not, more) important because they provide us with tangible evidence of how the economy might be weathering the geopolitical uncertainty. And as we continue to march along toward the 11^th year of the current cycle, it will be increasingly important to watch the economic data for signs of an inflection point.