S&P 500: +3.7%
S&P 500 Equal-Weight: +1.1%
Dow Jones: +2.0%
Nasdaq: +5.6%
MSCI EAFE: +1.9%
MSCI Emerging Markets: +7.1%
Bonds (US Aggregate): +1.1%
Economic & Policy Highlights
Interest Rates & Fed Outlook
- The Federal Reserve opted to cut rates by 25 basis points taking the target range to 4.00 – 4.25%, pointing to downside risks in employment
- This was the first rate cut in 9 months and was described by the FED as a risk management move
- The rate cut was done with the highest inflation backdrop in 30 years
- The US Inflation rate (CPI) accelerated to 2.9%, reaching the highest level since January, driven by housing, energy and services
- The ECB, Bank of Japan and Bank of England kept rates steady
- Inflation remains elevated not only in the US but also in major economies such as Mexico, EU, UK and Japan
- This persistent inflation is likely the cause for the rise in 30-year bond yields, globally
- Trade & Tariffs
- President Trump’s tariffs were ruled illegal by a lower court judge which prompted an appeal to the US Supreme Court
- US-China trade truce remained fragile
Employment & Growth
- Second-quarter US GDP was revised higher once again from 3.3% to 3.8%, expectations are for 3.8% in the third quarter
- GDP revisions were driven by much stronger consumer spending
- Statistics showed that job growth in tariff impacted sectors was weaker than non-tariff sectors
- US unemployment ticked up from 4.2% to 4.3%
- Global growth remains positive, led by the The Eurozone continues to grind along, while emerging market economies remain resilient. China’s growth remains sub-par due to trade related drag, deflationary pressures and rising unemployment
- Consumer spending & sentiment
- Consumer sentiment surveys continue to express caution and weakness
- However, actual overall consumer spending remains strong
- Unfortunately, the spending is skewed to the top 10% of income earners who now account for 50% of all spending
Geopolitical Volatility & Energy
- The US Government warned of a potential shutdown
- Oil fell 1.7% as OPEC contemplated bringing on idle capacity
- Gold rose 11.9% driven by continued central bank buying and investor demand
- Poland shot down Russian drones that breached Polish airspace
- The French Prime Minister resigned after failing to pass a budget that would address ongoing deficits, setting up potential national elections
Summary Impact
- Major indices were supported by optimism over AI spending and expectations for more rate cuts
- The Federal Reserve appears to be now more focused on the labour market at the expense of rising inflation
- Global risks continue to rise but capital markets continue to turn a blind eye
Commentary:
Markets ended another month in the black as AI mania and potential further interest rate cuts sustained investor euphoria. While the potential long-term returns on investment for AI remains murky at best, investors sent stocks skyrocketing on any AI related announcements. Most concerning is the circular nature of the feeding frenzy whereby one AI company announces an investment in another who immediately announces they will purchase services or products from this new investor. While we recognize that AI will have significant impacts on the future economy, we also know that not every company will succeed or even survive this journey. Markets are acting like every company will be a winner, but history has shown many times before only a few will win. The losers unfortunately will have eviscerated huge sums of capital along the way.
We believe the FED’s focus on the stalled job market is misguided as the likely causes (reduced immigration, AI and fewer government jobs) are out of the direct control of monetary policy. Potentially entrenched inflation represents a far greater risk to the economy and by extension to the stock market.
Valuations remain high, spreads are tight, volatility remains suppressed, and sentiment is euphoric. While none of these factors will tell us where a market top might lie, they do measure the magnitude of risk at any point in time. Cracks in sub-prime auto lending and dislocations in private equity/credit are warning signs we choose not to ignore. We continue to find and hold attractively priced companies in your portfolio with cash being deployed opportunistically.
