This Week in the Market

With Scott McCaghren and Tony LaPorta

Equity and treasury markets are almost indescribable in the current investment landscape that we find ourselves. Traditional correlations seem to be non-existent in the midst of what seems to be global chaos. We will use the written portion of this week’s commentary to ATTEMPT to make sense of the chaos as well as what it could mean for the equity and treasury markets going forward.

  1. Escalating tensions surrounding the trade war with China have the most obvious impact on domestic markets. Retaliatory measures have been thrown around from both sides, then just as quickly detracted. This has caused immense volatility both to the upside and down. It has become increasingly more difficult to separate fact from fiction or real from threat. This is somewhat concerning due to the market’s inability to find direction until things quiet down. Meanwhile, the S&P 500 has traded in a 175-point range for the entire month of August with very few signs of changing. This will likely lead to more of the same through September and October.

  2. The situation in Hong Kong appeared to be taking a chilling turn during the morning hours there. Video surfaced of hundreds of tanks and troops descending upon the city to address the ongoing protests. China claimed that this was a routine procedure and in no way was a mounting of armed forces. It is hard to believe that waking up to a significant show of force in the form of armored tanks is a “routine procedure”; however, markets bid like crazy on the heels of this. “Go figure” is the only term that comes to mind to describe the reaction, obviously our markets believed this to be routine as well. With social media being as prevalent as it is, any sort of military action will be seen across the world. We cannot surmise any other outcome in that scenario which would be positive for our markets.

  3. The Federal Reserve elected to drop interest rates by 25 basis points, bringing the fed funds rate to 2.00-2.25 percent. CME FedWatch is currently showing a 99.6% probability of another 25 basis point cut in mid-September, bringing the rate to 1.75-2.00%. The potential trouble with this has to do with a lack of room to drop rates if we were to slip into another recession. It is also concerning that interest rates are being cut in an economy that appears to be doing very well. This has us scratching our heads as to what ugly monster might be lurking out there globally that we are not aware of just yet. The excuse surrounding a lack of inflation has not been bought into by our team at this point. Worldwide monetary easing was never meant to be a permanent maneuver, yet here we still are eleven years later.

  4. The U.S. government has recently decided to issue what is referred to as an “ultra-long” bond. By ultra-long they mean a 100-year duration at roughly 3% interest. There is a cloud of confusion that hovers over this as to the need in doing this or to what purpose it is to serve. On the surface it is supposedly a measure to help steepen the yield curve, whether that will work or not is yet to be seen. An interesting side-note to this is that Japan has now overtaken China as our largest debt holder. This is due to Japan buying our sovereign debt as they are currently mired in a negative interest rate environment. In addition, China has dumped some odd 80 billion in U.S. treasuries; this was seemingly another retaliatory measure for the current trade war.

Now that we have all of the doom and gloom out of the way, let’s discuss the positives. Our portfolios maintain the volatility hedge which has been extremely essential in navigating the unprecedent environment we currently endure. This is very simply the most prudent approach for the near future given the current landscape, but also, the seasonal negative nature for the months of September and October. We wish everyone a very happy Labor Day weekend.

As always, we continue to monitor all equity, treasury, commodity and currency conditions in order to efficiently deploy capital as well as protect invested assets.

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