July Monthly Market Commentary
The Fed made moves, big tech got slapped and the candidates bristled.
Another month is in the books, and the more things change the more they stay the same. Stock markets seemed to climb to new heights in July while pundits continued to discount the rally and call for the next recession. Even presidential candidates got in on the doomsday predictions this month.
Just like in June, market-moving news is coming from the Fed, geopolitical tensions, and major technology companies. As the summer winds down, sit back and catch up on some highlights from July.
The Fed Making Moves
Chairman Jerome Powell seems to be the center of attention these days. Leading up to the July 30-31 meeting, the stock market seemed to predict the rate cut was coming and priced/ accordingly. The optics around these expectations are interesting.
Many pundits argue that the American economy appears to be in a strong position . GDP beat expectations in the second quarter and grew by 2.1%. The unemployment rate rose to 3.7% in June, but still hovered around 50 year lows. Even though the employment market is strong and the economy is experiencing moderate growth, the Fed aligned with expectations and cut rates by 25 basis points .
Some argue they caved to political pressure, while the Fed cited lower inflation and global concerns as the reasons for the cut. Regardless of the reasons for the rate cut, it is important to understand what happened and the potential implications.
Keep an eye on…
• Debt. Generally, as they cut the federal funds rate, the interest rates on variable rate products decrease. Many people assume there is a clear one-to-one relationship, but that is not always the case. Take, for example, interest rates on mortgages. The rate of ten year US Treasuries is a good indicator of thirty-year mortgage rates. Following the expected rate cut, the rate on the ten year ticked down slightly but nearly as much as the 25 basis point rate cut. It is important to review your debt accounts and understand how the rate change will impact the interest you pay. Refinancing your debt may also be worth considering, since it is estimated that millions of Americans would benefit from refinancing but have not taken the time to do so.
• Deposit accounts. Generally, as they cut the federal funds rate, the interest rates on checking and savings accounts decrease. Considering the average checking account pays .09% APY, most people will not feel the pain. Come to think of it, consider an account with a competitive interest rate if you are using an account at a traditional bank.
Republicans and Democrats Agree
Politicians on both sides of the aisle finally agree on something–It’s helpful to their careers to demonize big tech. Every week there seems to be a new lawmaker getting in on the action and driving news on this topic. Considering the next election is more than a year away, this could be a topic that stays relevant . As politicians make headlines, it is important to take a long-term perspective rather than reacting to the news of the day.
Keep an eye on…
• Big tech companies such as Google, Amazon, and Facebook. There appears to be pressure from both sides of the aisle on major technology companies. On the right, the Department of Justice launched an anti-trust review on major tech companies. On the left, presidential candidate Elizabeth Warren has shown a desire to break up major technology companies while raking in substantial donations from the employees of those same companies.
• Facebook’s crypto efforts.Recently, Facebook made a splash announcing their intention to launch Libra next year with the goal of revolutionizing and democratizing payments across the globe. Since the announcement, politicians on both sides of the aisle and across the globe have raised concerns . These concerns have led Facebook to admit that the launch of Libra might not be realistic next year.
• Twitter, Facebook, and YouTube. In an attempt to address how addictive social media has become, Senator Hawley introduced a bill to stop endless scrolling and force social media platforms to show users how much time they spend in their online rabbit holes. Since these platforms rely on engaged users, if an effort like this became law it could impact their business models.
The Times They Are a Changin’
Bob Dylan’s famous lyrics are just as applicable now as they were in 1964. Disruptive innovations have always caught the attention of investors, but July had some interesting news that investors may have glossed over.
Keep an eye on…
• Esports. Sixteen-year-old Kyle Giersdorf recently captured headlines by winning $3 million at the Fortnite World Cup . Over the last several years, esports has quietly expanded and is on pace to generate over one billion dollars in revenue this year. Analysts project the growth to continue with companies from chip-makers to hardware manufacturers benefiting along the way. With esports arenas popping up all over the country, it appears the industry could be in the early stages of popularity.
• Plant-based meat. Since going public earlier this year, Beyond Meat seemed to be the darling of Wall Street and even reached a market cap larger than traditional consumer staples such as Campbell Soup. Besides a selloff after announcing a secondary offering, expect to see increased competition in the plant-based meat space from established companies such as Nestle and Tyson Food. With nearly a quarter of American households purchasing meat alternatives , it will be interesting to see if the demand will continue to rise.
• Communication. There have been several recent mergers and acquisitions that show the focus on 5G. Apple recently settled a dispute with Qualcomm and set themselves up to develop their own modems by purchasing Intel’s modem business for $1 billion. Ironically, Apple’s billion dollar purchase pales compared to the $26 billion merger between T-Mobile and Sprint that experts believe is all about 5G . Interestingly, the race for 5G supremacy is not only between companies. As the trade war between the United States and China drags on, more focus is being placed on the future and importance of 5G .
• Diversification. Apple also made news last month when they announced their quarterly earnings. It was notable that their device sales dropped and fell short of analyst expectations. The bigger news came from the diversification of Apple’s revenue. Services such as AppleCare®, Apple Music®, and Apple Pay®, along with wearables became a bigger focus. At the same time, they set the stage for future innovation and revenue potential from the new Apple Card .
The More You Know
It tempts most investors at one point or another to time the market. We can all use logic why the market will go up or down. The problem is that trying to time the market is a bad idea. Looking at the S&P 500 from the beginning of 1999 until the end of 2018 , the average annual return was 5.62%. If you missed the ten best days, your average annual return would have been 2.01%.* Just ten days over two decades.
Plus you need to keep in mind , six of the ten best days occurred within two weeks of the ten worst days. Rather than timing the market, focus on developing a long-term diversified investment strategy. Your future self will be grateful.
*Source: J.P. Morgan Asset Management analysis using data from Bloomberg. Rates are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. For more details on this stat, visit J.P Morgan’s Principles for Successful Long Term Investing
The opinions and analysis expressed here are those of Brian Walsh as of August 1, 2019 and are for informational purposes only. Views may change as market, economic, and other conditions change. This information isn’t financial advice. Investment decisions should always be based on specific financial needs, goals and risk appetites.
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