• While the Fed cut interest rates last week, fading prospects for additional cuts beyond one more hurt market sentiment

• The announcement of new tariffs further damaged confidence and suggests the trade war will persist for some time.

• We think the global economic expansion can still continue, but investing will become more difficult from here.

Equity markets around the world moved lower last week, with the S&P 500 Index dropping 3.1% for its worst weekly performance of the year.1 As widely expected, the Federal Reserve cut interest rates for the first time since 2008, but expectations for future rate cuts fell. Additionally, President Trump’s announcement of new tariffs on Chinese goods hurt investor sentiment. Treasury markets rallied across the yield curve last week, and defensive utilities and REITs were the only equity sectors to make gains.1

10 Themes For Investors To Consider:

1. The announcement of new tariffs shows the trade war is here to stay. President Trump’s announcement of a 10% tariff on $300 billion worth of Chinese goods comes on top of the $250 billion of goods that already face a 25% tariff. The president appears to believe that Chinese authorities are unlikely to agree to a trade deal before the U.S. 2020 elections. The decision could potentially be delayed or reversed before the new tariffs go into effect in September, but we believe both countries must experience further pain before they can reach an agreement.

2. The prospects for additional Fed rate cuts have been lowered. At the press conference following last week’s 25-basis point rate cut, Chairman Powell indicated that only a U.S. recession would trigger a long series of further cuts. We expect perhaps one additional cut this fall before the Fed adopts a wait-and-see approach.

3. The labor market remains solid, but is slowing. Non-farm payroll growth fell to 164,000 in July, and previous months’ figures were revised downward.2 Unemployment remains at 3.7% and average hourly earnings increased slightly to an annual 3.2% pace.2

4. The U.S. business cycle appears to be in its latter stages. The 2019 annual GDP benchmark revisions showed a jump in employee compensation.3 That’s good news for consumers, but bad news for corporate profit margins. We think the revisions suggest the business cycle is in a later stage than many previously thought.

5. We expect U.S. dollar strength will reverse at some point. Stronger U.S. growth and higher relative interest rates have boosted the value of the dollar. We think the large budget and trade deficits should contribute to eventual dollar weakness.

6. Possible market risks associated with the 2020 election appear to be growing. With the notable exception of Joe Biden, the Democratic front-runners for the 2020 nomination have been focusing on social and environmental negatives associated with corporate profit margins. This suggests a stronger move toward higher corporate taxes following the election.

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