Markets “In a Nutshell” for July 23, 2019

Investment Week at a Glance

Stocks finished mostly down for the week.  The Dow Jones Industrial Average was down 0.65%, the S&P 500 fell 1.23%, the New York Stock Exchange Composite (2,000 stocks) fell 0.93% and the average investors index (Value Line Index) was down 1.35%.  Foreign stocks (DJ Global ex U.S.) were up 0.01%.  Bond prices were up for the week, pushing the yield on the 10-year U.S. Treasury down 6 basis points to end the week at 2.05%.  (Data source: Wall Street Journal)

Waiting for a Rate Cut

Markets seem anxious for a rate cut after mixed to weak earnings reports from mostly the big banks last week. Lower interest rates hurt bank profitability and a massive miss in subscriber estimates for Netflix saw its stock tank, a humbling reflection of the risk imposed in high-flying tech stocks that show any hint of slowing growth. Overall, earnings have been roughly what analysts thought they would be and the market seems poised to see a rate cut at the Federal Reserve meeting next week. There is almost certainly going to be at least a 0.25% rate cut, but recent Fed communication has sent possible belief of a 0.50% rate cut throughout the market. The Fed is stuck between wanting to be as proactive as possible to an economic slowdown and not capitulating to pressure from the White House and markets to do its bidding. A 0.25% is the most likely scenario and the real story from there will be the guidance on the path for the rest of the year. (Barron’s)

Budget Agreement Reached

Talks between Treasury Secretary Steven Mnuchin and House Majority Leader Nancy Pelosi ended Friday with a with an agreement on a two year budget plan and spending levels, avoiding a government shutdown and a possible default on government debt. The potential disruptions to the market could have been fairly traumatic in the short term and likely eased the process to reaching a deal. The only piece needing clarification would be spending offsets to seal the deal, but with spending levels increasing for the next two years to $2.7 trillion total, it seems like the only compromise both parties can agree on in this political environment is more spending for everybody. (Barron’s)

2nd Quarter GDP Release

The first estimate of economic growth for the 2nd quarter will be released on Friday this week and will likely show a slowing of the pace of growth from the 3.1% growth of the 1st quarter to an estimated 1.8%. While this is a large drop in the pace of growth, this ~2% is closer to the longer term average experienced over the course of the record long economic growth cycle and may just be a return to the slow and steady growth of previous years. With the trade war with China escalating to new levels and the immediate effects of the tax law wearing off, it is easy to understand why there is a return to this level, but markets are wondering if this is it or will the economy continue to slow into a recession. (Barron’s)

Quiz:

With over $13 trillion in negative yielding global government debt, which country has negative yields for every term from 1-year to 30-year bonds as of 6/30/2019?

a)   Sweden

b)   Germany

c)   Italy

d)   Switzerland

 

Answer is below …

 

Have a good week!

 

 

 

 

Answer to quiz:

d)   Switzerland has negative yielding debt all the way out to 30 year bonds, which were -0.03% on 6/30/2019 (Bloomberg)