With economic growth slowing around the world, the air in the balloon may be starting to cool down a bit. Going back to last year, most everyone believed the air going into the balloon was red hot and that economic growth was going to keep rising. Fast forward 12 months and we are starting to see more signs that challenges to economic growth, and our steady supply of hot air, are growing.
The Federal Reserve cut interest rates for the second time this year. The move marks only the second time since 2008 that rates have been cut. While this move was in line with the consensus, it re-iterates concerns that slowing economic growth and the ongoing tariff war with China could eventually bring on a recession. Many see the Fed’s latest move as “insurance” to help prevent the economy from slipping into recession. And, while we don’t see the data points that typically precede recession, we also don’t see anything that would suggest growth is about to pick back up. We may be in a “goldilocks” environment where growth rates as neither too low nor too high. This potential is supported by the fact that a non-recessionary environment paired with a second rate cut has typically been a pretty healthy environment for stocks.
The Federal Reserve is set to meet next week and is widely expected to cut short-term interest rates. While opinions vary on how much they will cut, most analysts expect .25%, with the outliers being as high as .50% or as low as 0%. These meetings will likely affect markets for the foreseeable future.
Right around this time last year, we were spending a lot of time talking to clients about fixed income. Most were concerned about their fixed income returns compared to what equities were doing, and many even posed a very direct question, “Why do we even own fixed income?”. Some of these questions were being asked rhetorically as I believe most investors know they needed fixed income in their portfolio, they were simply frustrated that a seemingly “safe” asset class was actually providing negative returns. Others were probably more serious, seeing that it was obvious that bonds were going to provide negative returns for the foreseeable future, and under no circumstance did that seem appealing. To be honest, it was a very fair question and one that was being asked by almost everyone. But, as often happens in markets, trades that seem so obvious in the moment have a way of humbling everyone.
If you have tuned into the financial news lately, you have probably heard the words “financial bubble” mentioned more than a few times. The first great financial bubble was “Tulipmania”. Tulipmania occurred in the Netherlands during in the 17th century. Without giving the full backstory of how this phenomenon began, tulips were introduced to Europe from the Ottoman Empire around 1550. These flowers were different from anything in Europe due to their intense color. They quickly became a symbol of status and were seen as luxury items. Speculators entered the market, buying and selling tulip bulbs with the expectation of making a profit.
Quick confession: I stole the title from an article I saw yesterday. I didn’t necessarily do so because I thought it was a great title; rather, it made me laugh and think, “Here we go again with these hyperbolic headlines.” This is probably the 5th or 6th “most important week of the year” so far, if anyone is keeping track. With that said, after the mild sarcasm, this could, in fact, be a very important week for the direction of the markets.