Markets have experienced two positive developments this summer, and one negative.
The first positive is that corporate results have outperformed investor expectations. With 80% of S&P 500 companies reporting second quarter earnings, profits are about 5% higher than predicted.
Positive number two is the Federal Reserve, which last week lowered interest rates for the first time in over a decade. The Fed cited “global developments” as the justification for the cut, by which they mean the trade war with China.
Markets typically have performed well in the twelve months following the first Fed rate cut. Exceptions include recessionary periods such as 2001 and 2007 (table). Perhaps a good historical template for today’s market is 1995 and 1998 when recessions did not occur and stocks went on to perform well.
On the negative side, the trade war with China escalated again last week. President Trump announced a 10% tariff increase beginning in September. China retaliated this morning by weakening its currency, which makes Chinese exports more competitive. It appears China is attempting to “slow walk” President Trump in hopes of a better negotiating environment after the 2020 election, while Trump is aiming to speed up the process with the latest tariff threat.