What’s on Tap: The Fed Eases Tensions, Iran Raises Them

  • The Fed Walks a Cautious Path on Interest Rates

  • U.S.-China Trade Talks Could Drive U.S. Monetary Policy

  • Middle East Morass as Persian Gulf Tension Escalates

  • Financial Planning Friday: The Importance of Being a Fiduciary

  • Looking Ahead to Housing Market, Consumer Data

The S&P 500 Index notched a record high on Thursday—a day after Federal Reserve Chair Jay Powell suggested that rather than continuing to raise interest rates, policymakers are leaning toward a cut. While the Dow Jones Industrial Average is still just shy of its previous all-time high, both indexes, after a withering May, are on pace for their best June in decades. The S&P 500 is up 7.3% so far this month through last night’s close—its best since 1955. The Dow’s 7.8% gain would be its best June since 1938.

For the year through Thursday, the Dow has gained 16.1%, while the broader S&P 500 has returned 19.0%. The MSCI EAFE index, a measure of developed international stock markets, is up 13.7%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has declined to 2.48% from 3.28% at 2018’s end. On a total return basis, the U.S. bond market has gained 6.0% for the year.

The Fed Walks a Cautious Path on Interest Rates

This week, policymakers at the Fed, the Bank of Japan and the European Central Bank signaled that they’re prepared to cut interest rates later in the year if needed. And earlier this month, China shifted from suggesting they would withdraw stimulus to providing more of it. That’s a unanimous (albeit uncoordinated) cautionary flag planted on market peaks.

For all that caution, fundamentals have not strayed far from a slow-growth, not no-growth path in the U.S. Following the Fed’s two-day meeting, Chair Powell noted that consumer spending is healthy, the labor market is tight, job creation is solid, wages are rising and household confidence is high. With 70% of economic activity driven by the consumer, all of those factors should add up to a continuing economic expansion.

Still, warning signs of deceleration on the manufacturing side may be showing. Monday’s unexpectedly weak Empire State manufacturing index and yesterday’s Philadelphia corollary suggest tariffs and supply chain disruptions may be taking a toll on the industrial sector.

Could this be the beginning of an economic slowdown for manufacturers? Possibly. But manufacturing accounts for 10% of U.S. economic activity, so the bigger question is whether the positive news from consumers and households will persist. We should get a partial answer next week, when new reports on consumer sentiment, spending and savings will be issued. Our bottom line remains that the U.S. consumer is still in very strong financial shape and can, for the moment, propel economic growth forward.

U.S.-China Trade Talks Could Drive U.S. Monetary Policy

The G-20 summit opens in Japan next week and the prospect of a meeting between President Trump and China’s President Xi—tweeted nine minutes after the open—did much to spur Tuesday’s stock market rally. Fed Chair Powell acknowledged that “news about trade has been driving sentiment.”

A deal between China and the U.S. is unlikely, but the bar for success seems low. As long as talks between Trump and Xi don’t break down, any progress would be seen as a win.

A China deal or lack thereof could be the driver of monetary policy in July. While inflation is quiet and the jobs market is strong, the Federal Reserve will be looking for a sign of progress on trade before deciding whether to cut interest rates at their next meeting. We expect Wall Street to remain finely attuned to every nuance of the ongoing talks.

Middle East Morass as Persian Gulf Tension Escalates

Tensions in the Persian Gulf flared again this week when Iranian forces shot down a U.S. Navy drone. The odds of conflagration can’t be ruled out—we woke this morning to reports President Trump had approved then called off a retaliatory missile strike Thursday night.

So far, the smoldering geopolitical mess has yet to send traders looking for a bunker to hide in. It is far from clear how or if tensions will subside. For now, the impact of further Middle East conflict remains truly unpredictable.

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Financial Planning Friday
The Importance of Being a Fiduciary

Perhaps lost in the geopolitical shuffle, the Securities & Exchange Commission (SEC) updated rules concerning the relationship between brokers and their clients this week. The SEC says brokers must act in the investor’s “best interests.”

Sounds great. But what does this mean? Perhaps less than you might think.

For one thing, the SEC’s rules cover broker-dealers. Historically, broker-dealers were regarded as, essentially, salespeople. Brokers were free to recommend any investment product to a customer so long as it was “suitable,” that is, it somehow met the customer’s needs—regardless of the investment’s costs or how much the broker would be paid for selling it.

The SEC’s new rules require brokers to recommend products that are in their clients' best interests to own. But they don’t strictly define what “best interests” means in practice. Instead, they merely require brokers to disclose any potential conflict to customers. And further, the new rule does not explicitly eliminate all of the pay practices that put a broker’s interests ahead of their investors’.

At Braver Capital Management, we are held to the highest standard: That of being a fiduciary. We’re always required to put a client’s interests before our own, something we’d do even if it wasn’t prescribed. It’s simply the right thing to do.

All of our Certified Financial Planner™ professionals are also held to the fiduciary standard as well as the CFP Board’s code of ethics—which we think is to the benefit of our clients.

In addition, we work only for you—we receive no commission from the funds we choose to invest in or recommend in any of our tactical strategies.

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Looking Ahead to Housing Market, Consumer Data

Next week, we will be receiving a steady stream of data on the state of the economy. We’ll see reports on the housing market—home prices, pending home sales and new home sales—and the consumer—personal income, spending and savings, as well as confidence and sentiment. Additionally, the final revision to first quarter GDP will be released along with data on core inflation and durable goods orders.

If you’d like to learn more about our tactical or fundamental investment strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note: This update was prepared on Friday, June 21, 2019, prior to the market’s close.

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