June 28, 2019 Letter to Clients

This quarterly letter finds us already at the halfway point of 2019, and I hope it finds you and your family enjoying a pleasant start to the long-awaited summer season.

Halftime Report

Many of the headlines that dominated the news throughout the first two quarters of this year, such as trade tensions, interest rates and geopolitical issues, continue to do so as we enter the third quarter and are expected to be ongoing for at least the remainder of 2019. The first half of the year found the markets off to a robust start with a rebound from the dismal end to 2018. The dramatic shift from the Federal Reserve in the earlier part of the year played a pivotal role in the improving financial conditions we saw in both the first and second quarters.

By the time you read this letter, we will have entered the longest economic expansion in U.S. history. A healthy labor market, rising wages and strength in consumer spending have mostly offset the destabilizing effect of the continued trade tensions. Inflation also remains low and the unemployment rate in May was 3.6%, the lowest since the 1960s. The U.S. gross domestic product, which measures the nation’s production output, is expected to grow between 2% and 3% this year. And while some crosscurrents remain due to uncertainties surrounding trade and Fed policy, the U.S. economy should continue to grow at a modest pace as economic fundamentals remain sound.

Trade, Tariffs & Geopolitical Relations

For some time now we’ve watched the trade tensions continue to linger between the U.S. and China with little resolution and quite frankly it’s impossible to know how long this trade war will drag on. The erratic patterns of the trade negotiations have Wall Street and investors weighing the possible consequences as the effects of the already imposed tariffs on approximately $200 billion of Chinese imports have taken shape with the U.S. importing $20.6 billion less from China between January and April this year in contrast to this same period in 2018.  Companies that sell everything from toys to travel goods are dependent on China to make a large share of their merchandise and if President Trump proceeds with the proposed additional 25% tariffs on $325 billion of Chinese goods, the costs these companies pay to import their goods to the U.S. will rise. It is unclear as to whether the increase in prices will be an absorbed expense or passed onto the consumer entirely, but an escalation in trade tensions in the near-term could pose a threat to global growth and corporate profits, nonetheless.

While trade talks between the two nations resumed ahead of the G20 Summit and a U.S.-China trade deal could be within reach, actual deliverables may be more modest than previously expected. It is difficult to know exactly what a deal might look like, but enforcement will be essential to any agreement. Washington will need some type of enforcement procedures in place to ensure China holds up their end of the deal, which most likely means reduced tariffs rather than a complete removal of tariffs. I do believe, however, that the U.S. economy is strong enough to withstand the uncertainty from the trade tensions.

In other news, oil prices rose recently after the situation between Iran and the United States escalated following the attack of two tankers and a U.S. drone near the Strait of Hormuz, which U.S. authorities blamed on Tehran. Washington in response levied new sanctions against Iran to increase pressure on the country to abandon the pursuit of nuclear weapons. Investors fear an attack on Iran would disrupt energy flows from the Middle East, a region that supplies more than a fifth of the world’s oil output, and ultimately drive oil prices higher. But despite rising tensions with Iran, gas prices at home seem to be uninterested in the escalation. AAA reports that although gas demand in June increased, prices at the pump have moved even lower.

Interest Rates

With signals from the Federal Reserve in June that it will “act as appropriate” to maintain the current U.S. economic expansion, the markets are pricing in interest rate cuts in the near term. The Fed’s efforts to steer economic growth are largely dependent on evolving risk factors and economic data available. While inflationary pressures have been muted, the committee continues to monitor additional areas that might warrant a rate cut including economic weakness outside the U.S., trade concerns, weaker business investment and declining consumer sentiment in the markets.

While Wall Street is expecting an interest rate cut in the Fed’s July meeting, the cut is not entirely guaranteed. It’s plausible that the Fed could decide against trimming rates in July; however, they will want to be mindful of the impact that holding rates will have on the financial markets. As I indicated in past letters, I do anticipate at least one interest rate cut this year as the Fed will be looking to continue the expansion and avoid a shock to the markets.

In Closing

It’s impossible to know exactly what lies ahead, but I anticipate the markets will move somewhat sideways this summer with bouts of volatility should the issues discussed previously remain unresolved. Investor sentiment may have cooled somewhat momentarily as investors consider the impact of upcoming events including the next Fed meeting in July and the anticipated U.S.-China trade talks, but I do expect attractive buying opportunities to arise throughout the remainder of 2019 and we will continue to adjust our clients’ portfolios in preparation for and in response to activity we see in the markets. Given the current environment, my approach as your financial advisor is to focus on sound fundamentals and invest intelligently so that we reach your short and long-term goals while mitigating portfolio risk and capturing potential reward.

I recognize this time of year can be busy for many of you with summer travel and other events but should you have any major life changes you would like to discuss that may impact your financial plan or if you have questions regarding your portfolio, I welcome the opportunity to meet or have a phone conversation with you. Until we speak again, we wish you a very enjoyable and relaxing summer.


Steven LePage