In a week of mixed economic data releases, the US and China announced they would resume trade talks next month – pushing the S&P 500 back toward a record high and tempering market expectations for additional interest rate cuts by year end.

The two sides will resume low-level talks over the next couple of weeks, ahead of a planned higher-level meeting in Washington early next month. With the ceasefire after the June G20 meeting lasting barely a month before President Donald Trump announced a new round of tariffs covering the remainder of Chinese imports it’s important to keep expectations cautious about this new round of negotiations. The talks will come too late to prevent the planned increase in the tariff rate to 30%, from 25%, on $250bn of Chinese imports on October 1st. At best, a new thawing in the relationship might persuade Trump to delay further the introduction of a 15% tariff on roughly $150bn of Chinese imports of consumer goods and electronics which are currently scheduled to take effect in mid-December.

Any deal that would see the removal of the tariffs already imposed seems unlikely, at least within the next 12 months. At this stage, both sides have an incentive to wait until after next year’s presidential election in November. The Chinese will be hoping that Trump loses. Trump will be hoping that the ongoing conflict is a vote winner – and that if he wins, we believe the Chinese will be out of options and forced to make a deal. Ahead of next year’s election, the question is whether we will see a further escalation in the trade war, with progressively higher tariffs and the possible introduction of non-tariff measures too? Given the gradual ratcheting up of tariffs over the past two years, it would be a surprise if we didn’t see any continued escalation next year. But we suspect it will be relatively modest, particularly if signs begin to emerge that the earlier tariff rounds were weighing on the US economy.

The Economy

Mixed data reported a fall in the manufacturing index to 49.1, a three-year low, which triggered renewed fears of a recession. With the US consumer seemingly single-handedly keeping the global economy afloat, August’s retail sales figures, due next Friday, will be particularly closely watched. Core CPI inflation continued to edge higher again in August to 2.3%. CPI has been boosted by unusually large gains in used vehicle prices. With auto dealers still carrying plenty of inventory, new vehicle prices are likely to decline too. Gasoline prices fell by 3% last month as well.

The Federal Reserve

The sharp fall in market interest rates over the past 12 months is starting to support the economy, with activity growth in rate-sensitive sectors like durables consumption and housing rebounding in recent months. With income growth slowing and the manufacturing sector being hammered by weak global demand, this won’t prevent a further economic slowdown, but it does make it a little more likely the economy can weather the trade war and avoid an outright recession.

The plunge in market interest rates this year has been driven mainly by shifting expectations for Fed policy, as officials backed away from further rate hikes and then started cutting rates, with the markets ramping up expectations of further loosening to come. Following the plunge in rates since the start of this year, however, the real two-year Treasury yield is no higher now than it was in early 2017, while the actual borrowing costs facing consumers and firms are also falling sharply. Recent data suggest that the boost from lower interest rates is starting to feed through to the economy. The decline in corporate bond yields should provide some support for business equipment investment growth, offsetting some of the damage from heightened trade uncertainty.

Brexit

Earlier this week, political upheaval once again shook the United Kingdom. In a surprising turn of events, newly-appointed Prime Minister Boris Johnson’s government lost its majority after a former Conservative minister joined the Liberal Democrats. Following this shake-up, the odds of a no-deal Brexit, not so long ago a strong possibility from the hardline Conservative administration, appear to have somewhat declined. In response to this ongoing confusion, Bank of England Governor Mark Carney announced that the central bank estimates a 5.5% contraction in the UK economy in the event of a “worst case scenario” Brexit, involving severe disruption to the trade of goods and services and damage to UK financial institutions in the event of no deal. Moreover, Carney reiterated that the Bank of England would remain uninvolved in the precipitous fall of Sterling, which has declined substantially since the original vote in June 2016.

Conclusion

Realize that the media has a huge impact on your perceptions and can easily drive your decision-making process. Data shows that from 1997 to 2016, the average U.S. investor performed about 70% worse than the rate of return on the S&P 500. This data says that the average investor gained about 2.3% in annualized returns, versus the 7.7% annualized return of the S&P 500. One major contribution to this large gap is the judgment of the investor. When we react to news, we tend to make quick, uninformed investment decisions–which lead to financial losses over time. With all of the political uncertainly affecting the markets today, a resolution to one of these major issues like China or Brexit could change the picture and cause markets to rally. We feel using history as a guide, approaching your investments with balance and diversification in a portfolio you feel comfortable sticking with through various market cycles makes the most sense. We don’t recommend trying to guess the timing of the market or following someone claiming to know the future. Instead, we recommend systematically and methodically re-balancing your portfolio as the market moves up and down and take the emotional knee-jerking out of the picture. Be willing to check yourself and make sure your pre-conceived notions are not affecting your perception of the situation.

Disclaimers
Past performance does not guarantee future results, which may vary. This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities-based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at www.adviserinfo.sec.gov

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy.  Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purposes. By receiving this communication you agree with the intended purpose described above. Any examples used in this material are generic, hypothetical and for illustration purposes only. None of Callan Capital, its affiliates or representatives is suggesting that the recipient or any other person take a specific course of action or any action at all. Communications such as this are not impartial and are provided in connection with the advertising and marketing of products and services. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation.

Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS
Copyright 2019 Callan Capital, All Rights Reserved.

1250 Prospect St. Suite 1, La Jolla, CA 92037
4611 Bee Cave Rd. Suite 201, Austin, TX 78746
www.callancapital.com

The Federal Reserve cut rates this week by a quarter of a point. According to the Fed, the cut was a response to “the implications of global developments for the economic outlook as well as muted inflation pressures.” Fed Chair Jerome Powell characterized it as a “mid-cycle adjustment to policy” that provides some insurance to protect against downside risks.

Powell suggested that this cut won’t be followed by another at the next meeting in mid-September. The statement regarding the cut offered an almost identical assessment of economic conditions to the one issued in June. Labor market conditions were described as “strong” and GDP growth as “moderate”. There was no suggestion that Fed officials were more worried about the economic outlook than they were before. That’s not a surprise since the incoming activity data have been fairly resilient over the past six weeks, with GDP growth only slowing to a still healthy 2.1% annualized in the second quarter.

The vote to cut was not unanimous, with Esther George and Eric Rosengren preferring to leave rates unchanged. That wasn’t a complete surprise since both has publicly expressed their opposition to a cut in the run up to this meeting. But two dissents are a little unusual and suggests there was a broader minority of non-voting officials who were also uncomfortable with the rate cut.

Economic Growth

The economic expansion enters its 11th year in July, making it the longest expansion since 1900¹. However, growth is set to decelerate further, and resume its expansion average pace of roughly 2%. Second-quarter GDP growth slowed to 2.1% annualized, from 3.1% in the first quarter, but that drop off would have been even bigger if not for a surprisingly strong gain in government expenditure this quarter. Government spending increased by 5.0%, the strongest quarterly gain in a decade.

The week ahead is the peak week in the earnings season with 168 of S&P 500 companies set to report. So far, with 54% of S&P 500 market cap in the door as of Friday morning, 77% of firms have beaten earnings expectations, compared to 69% and 74% over the past two quarters respectively. However, in absolute terms, the year-over-year gain in earnings per share is tracking just 2% for the quarter, all of which can be accounted for by a reduction in share count due to strong buybacks. This buyback effect will likely fade in coming quarters, both due to the diminished impact of cash repatriated in response to the Tax Act of 2017 and because, at higher stock prices, it simply takes more dollars to reduce share count in a significant way.

Almost 10 years of monetary stimulus, economic growth and falling unemployment have succeeded in boosting home prices, bond prices and stock prices. However, they have not had a meaningful impact on consumer prices. Oil’s collapse brought headline inflation down, and despite a temporary rebound in oil prices, it failed to lift inflation. The Fed has acknowledged this persistently low inflation by lowering its projections for year-end inflation to just 1.5%.

China and Trade 

Trump announced Thursday that he would impose a 10% tariff on a further $300 billion in Chinese imports, a move set to hit American consumers more directly than his other tariffs so far. The new import taxes, which Trump later said could go “well beyond” 25%, will be imposed beginning Sept. 1 on a long list of goods expected to include smart-phones, laptop computers and children’s clothing. “If the U.S. is going to implement the additional tariffs, China will have to take necessary countermeasures,” Foreign Ministry spokeswoman Hua Chunying said at a regular briefing in Beijing on Friday. She didn’t elaborate on what the measures would be. “China won’t accept any maximum pressure, threat, or blackmailing, and won’t compromise at all on major principle matters,” Hua said.

The Market

Long-term interest rates remain very low, especially compared to historical averages.  The 10 year treasury hit 1.84 after the tariff announcement, which means investors are guaranteed a loss in real terms after accounting for inflation). In addition, a more dovish Fed could bring short term rates even lower from here. Therefore, in this rate environment and at this stage in the economic cycle, diversification in fixed income investing outside of treasuries has become increasingly important. 

Market volatility in the fourth quarter of 2018 brought equity valuations closer to their long-run averages; however, equity markets have moved higher this year and have achieved new market highs. Although valuations do not appear to be overextended, they are not cheap either on an absolute basis. However, valuations relative to fixed income remain attractive.  It is important for investors not to be positioned too aggressively, as many uncertainties, such as the Fed’s next move, trade and growth, remain, and may cause volatility ahead.

The Debt Ceiling

The Senate passed a broad, two-year budget deal on Thursday that boosts spending and eliminates the threat of a debt default until after the 2020 election, while reducing the chances for another government shutdown. The government spends more money than it brings in through revenue, and it covers the difference by issuing debt. But the Treasury Department can only issue debt up to a limit set by Congress, known as the debt ceiling. If the debt ceiling is not lifted, the government could fall behind on some of its payments, which could spark another financial crisis.

The government now spends roughly $4.4 trillion and is expected to bring in roughly $3.5 trillion in revenue, leaving a gap of $900 billion. A number of Senate Republicans, including some who support Trump strongly on most issues, were reluctant to go along. The national debt now stands at $22 trillion, but the deal makes no attempt to rein in spending, take on entitlements, or make any structural changes many Republicans say are necessary to reform Washington’s dysfunctional budget process.

Conclusion

For investors, this has been an exceptionally positive year so far, with large cap U.S. stocks gaining more than 20%² even as interest rates drift down in anticipation of an easier Fed. However, with a clearer big picture, we believe it is more important to take advantage of valuation opportunities both within particular sectors of the U.S. equity and fixed income markets and in lagging stock markets overseas.

1, 2 https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/economic-overview

Disclaimers
Past performance does not guarantee future results, which may vary. This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities-based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at www.adviserinfo.sec.gov

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy.  Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purposes. By receiving this communication you agree with the intended purpose described above. Any examples used in this material are generic, hypothetical and for illustration purposes only. None of Callan Capital, its affiliates or representatives is suggesting that the recipient or any other person take a specific course of action or any action at all. Communications such as this are not impartial and are provided in connection with the advertising and marketing of products and services. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation.

Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS
Copyright 2019 Callan Capital, All Rights Reserved.

1250 Prospect St. Suite 1, La Jolla, CA 92037
4611 Bee Cave Rd. Suite 201, Austin, TX 78746
www.callancapital.com

In last week’s meeting between Presidents Trump and Xi at the G-20, both sides agreed to resume negotiations and hold off on imposing new tariffs. Trump pledged not to introduce the much feared 25% tariff on an additional $300bn in Chinese imports as trade negotiations continue. Had those tariffs gone into place, they had the potential to do significant damage to second-half economic and earnings growth prospects.

As a result, Wall Street opened at a record  on renewed hopes of a US-China trade deal after the leaders of the world’s two biggest economies agreed to restart negotiations. The S&P 500 rose 1.2%, enough to make a new high in opening trade. Technology stocks are also up after the U.S. reversed policies preventing American companies from selling software and equipment to Chinese telecommunication giant Huawei. The tech-loaded Nasdaq Composite made an opening gain of 1.8% on the news.

The good news caused China’s renminbi to strengthen after haven assets like gold weakened today on hopes of a US-China trade deal on the horizon. China’s CSI 300 index of major Shanghai and Shenzhen-listed stocks rallied 2.9%. Haven assets lost some luster, with gold falling 1.1%. The yield on the 10-year US Treasury rose 1.2 basis points as investors continued to move out of the debt. We’ve been here before, however, and many analysts are warning that a trade deal between the US and China remain elusive, and that recent economic indicators were still weak.

Economic Growth

We continue to expect Gross Domestic Product (GDP) growth to slow in the second half of this year, which may prompt the Federal Reserve to cut interest rates. The Fed signaled at the June Federal Open Market Committee meeting that interest rates are likely to be cut over the coming quarters. Although markets are convinced the first cut will come in July, we still think that a temporary truce in the trade war means it is more likely that cut will be delayed until September. Regardless of the exact timing and overall magnitude of the coming rate cuts, the substantial drop back in long-term borrowing costs that we have already seen is a good reason to believe that economic growth will enjoy a modest recovery from mid-2020 onwards.

It was inevitable that GDP growth would slow once the impact of last year’s fiscal stimulus began to fade, particularly as the full impact of the Fed’s interest rate hikes is still flowing through. That drag from an increasingly more adverse policy mix has been exacerbated by a slowdown in other parts of the global economy in the second half of last year, particularly in Europe and China.

While this week brought some more positive news on investment, the modest gain in real consumption in May, together with revisions to previous months’ data mean second-quarter consumption growth now looks set to be 3.8% annualized, a little weaker than the 4% gain we had predicted.

Consumer Confidence numbers this coming Tuesday and Consumer Sentiment numbers on Friday should remain at high levels. If consumer spending continues to grow solidly, the economy should be able to avoid recession. And if there is no recession, earnings should continue to grow, however slowly.

Recent manufacturing momentum has slowed markedly. Over the past few quarters, there has been a notable deterioration in the distribution of global growth, with the services sector continuing to look relatively healthy but the manufacturing sector coming under a great deal of pressure. We believe this is largely due to dovish monetary policy globally and the continued tension of the trade wars. The uncertainty is dragging on business confidence, business investment and exports. Manufacturing momentum can be a good proxy for what we can expect GDP growth to look like. Policy uncertainty remains elevated, and when businesses are not confident in the outlook, the first thing they typically pull back on is investment spending. Although it feels as if we are making forward progress on trade relations with China, and there should be more clarity on the Brexit timetable, there are still a number of issues that remain unresolved. As such, while global manufacturing may begin to show some signs of life in the coming months, the more important issue for investors will be whether uncertainty is rising or falling.

Oil Prices

Oil prices are up, OPEC and its allies look to extend supply cuts until at least the end of 2019 at their meeting in Vienna this week. Oil prices climbed, boosted by brighter prospects for global trade as well as an extension of production cuts by Opec+. Brent crude oil, the global benchmark, rose 2.3% to $66.24 a barrel. Iran – under U.S. sanctions alongside OPEC ally Venezuela – joined top producers Saudi Arabia, Iraq and Russia in supporting an extension of a supply cut deal until at least December.

Bond and Stock Market

Usually, stocks go up when investors are increasingly bullish about the economy, and Treasury bond yields typically fall when investors are increasingly bearish about the economy, but these two effects are happening simultaneously. The apparent contradiction is difficult to reconcile.  The conflicting signals in the stock and bond markets may simply be a short-term anomaly.  It is really too close a call, for now, as to whether the stock market or the bond market has it right. Consequently, investors should not bet too heavily on one outcome or the other but rather remain well diversified.

For long-term investors, it is important to emphasize that the global economy trends upward over long-time horizons. We believe most successful investors will likely be those who focus on valuation rather than timing.

Disclaimers
Past performance does not guarantee future results, which may vary. This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities-based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at www.adviserinfo.sec.gov

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy.  Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. The CSI 300 Index is a free-float weighted index that consists of 300 A-share stocks listed on the Shanghai or Shenzhen Stock Exchanges. Brent Crude is a major trading classification of sweet light crude oil that serves as a benchmark price for purchases of oil worldwide. The Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. An investor cannot invest directly in an index.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purposes. By receiving this communication you agree with the intended purpose described above. Any examples used in this material are generic, hypothetical and for illustration purposes only. None of Callan Capital, its affiliates or representatives is suggesting that the recipient or any other person take a specific course of action or any action at all. Communications such as this are not impartial and are provided in connection with the advertising and marketing of products and services. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation.

Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS
Copyright 2019 Callan Capital, All Rights Reserved.

1250 Prospect St. Suite 1, La Jolla, CA 92037
4611 Bee Cave Rd. Suite 201, Austin, TX 78746
www.callancapital.com