August Update, 2019: Summer Market Commentary

Markets have exhibited a great deal of volatility over the last two months. It has not been uncommon for markets to fall by 400 points one day, and to rebound by the same amount the next. There are various explanations for these violent swings, ranging from trade war concerns to recession worries that are mostly caused by poor trade war news and interest rates being raised too high. It’s important to know that these concerns are not new, and that the markets hit new highs earlier this summer despite already knowing of these issues. We think the real reason for the volatility is day traders looking for nickels in front of the steamroller of long-term growth.

We recently penned a write up on the U.S. and China trade war where we pointed out that while China is a big economy, its impact on America and the U.S. companies you own is limited. It’s more important from a sentiment perspective for investors. The impact on consumers of the tariffs caused by the trade war is comparable to a 5-cent increase in gas prices. It’s not fun, but people will still drive their cars.

Many are talking about how the recent interest rate declines are signaling an impending recession. It’s true that in the past when interest rates have behaved this way it has been a good indicator of problems to come. It is also true that the problems may not happen for up to a couple of years later. Furthermore, markets have often continued to march higher when the yield curve inverts like it has recently.

Others correctly point out that this “inversion of interest rates” may be faulted on the fact that $16 trillion worth of bonds in Europe and parts of Asia are paying negative interest rates. Rates in the U.S. are therefore ridiculously high in comparison and investors are piling into U.S. bonds, driving their prices up and interest rates down. These investors may simply be trying to earn a return not project a recession.

While the U.S. economy has slowed, it is very much still growing. Most people seem to have a job, incomes are rising, and house prices are strong. Corporate profits, while increasing at a lower rate, are still very high. And interest rates are really low.

No one is immune and portfolios will be buffeted by short-term swings, but we feel that holding the course and staying invested for the long haul is the right path. Your portfolios are well diversified in leading companies with strong balance sheets. All portfolios have good buffers of cash. We are on the lookout for extreme negativity which would signal an opportunity to invest in bargains.

Just like the fourth quarter of last year where many lost their heads worrying about a recession, we think this too will pass. Nonetheless, we welcome any questions you may have during these last few days of the summer swoon of 2019.

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