The U.S. economy continues to move ahead nicely, although world economies outside of the US are slowing.
Fed Chairman Powell and Vice-chair Clarida each gave major speeches this week, and both were dovish and data-dependent in their outlook. Both expect some more interest rate increases, but it is unlikely that they will demand three or four rate increases next year. If the world and U.S. economy continue to slowly moderate, there could be between zero and two rate increases in 2019. This removes one of the major threats to stock values in the U.S. — fear of higher interest rates.
After Mr. Clarida’s comments, the stock market rallied, and after Mr. Powell’s remarks yesterday, the market enjoyed a bigger rally. Will the rally continue? The answer to that, in our view, will be determined by the meeting between Presidents Xi and Trump on Saturday night for dinner and discussions of U.S./China trade. A positive meeting that delays further tariffs on China for awhile, or comes to a settlement, would be very positively received, while a continuation of the current and increased tariffs would have a negative effect on U.S. stock prices.
The Brexit negotiations and Italian budget tensions are both weighing on European stock values, but the lower interest rate outlook for the U.S. and the resultant lower U.S. dollar are reasons to look at Europe. We remain interested but on the sidelines about Europe.
The China/U.S. negotiations coming up this Saturday night will have a major impact on investor interest in Asia. A settlement or delay in further tariffs will allow Asian stocks to rally, while increased tariffs will keep parts of Asia unattractive. India is our favorite Asian market, as their stocks are not historically correlated with developed-world markets, and they are growing without any tariff problems. India exports mostly services, and is not considered a trade malefactor.
Mexico remains a trouble spot, and investors have become nervous about President López Obrador. Argentina’s stock market is OK, as is Columbia’s, but Brazil is where the enthusiasm and opportunity seems greatest.
Gold remains in a trading range. If the U.S. dollar falls in value due to new perceptions about Fed policies leading to lower U.S. interest rates, and thus a lower U.S. dollar, it will be beneficial to gold and to commodities traded in dollars.
The ongoing crypto bear market is very similar to those of the past. The top-to-bottom decline mirrors that of several other declines in bitcoin history. Retail interest, gauged by Google searches for crypto-related terms, is very low. Institutions are delaying plans to roll out crypto-related projects, and of those crypto funds which have not folded, many are sitting on the sidelines, waiting for more clarity about regulations, the advent of government-sponsored digital currencies, market transparency, and the usual litany of concerns.
Thanks for listening; we welcome your calls and questions.