The bull market in equities continued its march forward in July and hit new record highs. Developments in global trade and monetary policy dominated market movements throughout the month.
The Bank of Canada left its benchmark interest rate unchanged in July and stated that they are closely watching the risks tariff wars place on the global economy; they’re echoing a dovish sentiment. The Bank of Canada also announced that they expect growth to accelerate over the next year. We’ll now look to next month to see if the Bank of Canada follows the Fed’s suit.
July saw the Dow Jones pass the 27,000 mark and the S&P 500 pass 3,000 for the first time in their histories. An expanding economy, rising corporate profits, and a low interest rate environment are what have driven markets to this point.
Although markets continue to soar to new highs there is presently a balance of risks in the marketplace to the downside and to the upside. Fundamentals are healthy (e.g, good liquidity, low unemployment claims, strong consumer confidence, and plenty of job openings); there are however some obvious headwinds, such as tariff wars, geopolitical conflicts, and weakening manufacturing surveys. While we believe that the base the fundamentals provide is solid enough for the US market to continue moving forward, the threat of global trade uncertainty will keep that growth in check.
As a response to this uncertainty, the Federal Reserve cut interest rates for the first time since 2008. The motivation of this cut is to embolden the markets while it weathers this storm and encourage the economy to continue on its course.
Trade talks resumed between China and the US late in July. It’s unlikely that a deal will be reached in the short-term due to the complex nature of the problems the two parties have with each other, however it is encouraging that they’ve resumed talks. We expect developments between the two sides to create volatility in global equity markets and continue to affect the global economy.
Boris Johnson has become the new prime minister of the UK. His tenure will be defined by how he handles the UK’s departure from the EU, which he’s vowed to leave before the Halloween deadline. Mr. Johnson’s arrival has elevated investors concerns that the UK might depart under a no-deal scenario. As a result, the British pound has been pushed to its lowest level since the Brexit vote.
Geopolitical tensions have also been on the rise as there have been escalations and events between many nations such as the US, Iran, the UK, Japan, South Korea, Russia, China, and Hong Kong. Geopolitical risks will be monitored closely; they’re a source of uncertainty for market participants as they can have adverse impacts on economies, financial markets, and currencies. The longer these risks persist, the more likely other economies are to follow the same path as the US and keep their respective markets moving forward.
There’s plenty of noise present in financial markets, so it’s important as investors that we don’t get distracted by the noise and instead stay the course and remain disciplined. Volatility is nothing to lose sleep over as it’s a normal feature of equity markets. Many of the risks discussed can be mitigated by choosing an appropriate mix of exposure to the bond markets and equity markets as well as remaining diversified across sectors and countries.
Reward yourself for your own self-discipline by checking your InvisorGPS and tracking your progress towards your goals. Think about how happy future you will be that you invested in your financial future.