The Capital Markets

For a clear picture of the economy and capital markets from last quarter, check out the latest Capital Markets Review: https://go.rjf.com/2Y39Iry .

Trade Clouds Parting

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 10/14/2019

Trade disputes have been an ongoing soap opera since President Trump took office. From steel tariffs to trade skirmishes with China, Japan, Canada, Mexico, South Korea, and the European Union, among others, it's been hard to keep track!

But over the past few months we think a trend toward settlement of these disputes has emerged. Congress must still act on the new version of NAFTA with Mexico and Canada – USMCA – but as Democrats in the House of Representatives consider impeaching the president, they should also become more interested in showing they're not only interested in all scandal, all the time. Passing some broad bi-partisan legislation and USMCA would be a good start. Look for it to get passed by early 2020, putting our disputes with our two largest export markets behind us.

From the perspective of US economic growth, the relationship with China has received way too much attention in the past couple of years. Even before the trade dispute started, US exports to China were a smaller share of our GDP than exports to Japan were before the Japanese economy went into a long-term funk in the early 1990s. If the US could prosper in the 1990s in spite of Japan's problems, the US economy overall should be able to absorb softer demand for our products coming from China, which lags well behind Canada and Mexico as an export market.

But last week's news indicates a deal is getting close. It will not be a huge deal that comprehensively puts all our trade issues with China to rest; not even close. But it will likely mean no new additional restrictions from now through 2020, and some rolling back of tariffs put in place in the last couple of years.

Meanwhile, the US recently concluded a trade deal with Japan.

None of this suggests we are fully out of the woods on trade issues. We doubt China will stop its theft of intellectual property, and so, expect a trade dispute with China to re-emerge in 2021 no matter who wins the presidential election next year. In the meantime, tariffs and the threat of other economic sanctions on China were always more damaging to China than the US. That's why we never worried as much as the conventional wisdom.

But nothing that's happened in the last few years suggests we are entering some sort of Smoot-Hawley-like downward spiral in international trade. US merchandise imports dropped 70% from 1929 to 1932 while exports dropped 69%. That's a downward spiral! US imports didn't reach 1929 levels again until 1946.

By contrast, even before the recent trade deals with Mexico, Canada, and Japan have been implemented, US trade with the rest of the world has been rising. In the past twelve months, exports and imports of goods and services combined have been $5.65 trillion, versus $5.63 trillion in calendar 2018, $5.26 trillion in 2017, and $4.93 trillion in 2016. Even without deals, trade could be hitting a record high this year.

The US economy has been and will continue to be much more resilient than many think. Trade has increased uncertainty, but was never as big a threat as feared. And, as trade relations improve, stocks will make up lost ground. We were never as worried as the conventional wisdom, and now it will come around.

Weekly Economic Monitor - The Economy, Trade Policy, and Other Things

Economic Research Published by Raymond James & Associates

Scott J. Brown, Ph.D.

September 27, 2019

Financial market participants have generally reacted little to economic data reports over the last several months. On a daily basis, the two key drivers have been trade policy and the Fed, and that’s expected to continue for the foreseeable future. However, tensions in Washington have escalated and are about as bad as they can get. The financial markets weren’t much perturbed by developments, but that may change.

The economic data reports have remained mixed, suggesting moderate growth in consumer spending, but general weakness in business investment. That pattern is expected to continue in the near term.

For more information on this article please follow the link below:

https://raymondjames.bluematrix.com/sellside/EmailDocViewer?encrypt=c38c9fe2-6f0c-49f9-9239-7d738c695b84&mime=pdf&co=raymondjames&id=matt.goodrich@raymondjames.com&source=mail

Repo Turmoil

First Trust Monday Morning Outlook

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist

Date: 9/30/2019

In Ronald Reagan's famous A Time For Choosing speech in 1964, he said "...the more the plans fail, the more the planners plan." We were reminded of this recently after pundits freaked out when the New York Federal Reserve injected reserves into the banking system to keep some short-term rates from rising.

A few things to keep in mind:

1) The jump in the overnight repo and federal funds rates was at the "tail" of the market. Most trading in the market was "normal," with average rates rising just a little, but some small amount of trading went off at a higher bid. In other words, this was NOT a serious system-wide shortage of reserves.

2) The reason most trading saw little impact is because there are $1.4 trillion of "excess reserves" in the banking system. So, contrary to much of the press coverage of this issue, the NY Fed repo operations were not due to a shortage of reserves.

3) The actual amount of reserve operations, somewhere between $45 and $75 billion per day, is well below the level of daily trading in reserves in previous decades. During the 1990s, for example, $150-250 billion in federal funds traded each day. In the 2000s, it went above $300 billion.

The recent turmoil is because two things have changed since 2008 that have created new problems for the banking system and the Fed. First, the Fed decided to stop managing policy like it used to. Second, new banking regulations have created liquidity problems in the banking system even when banks have ample capital, liquidity, and profits.

Central banks used to add and subtract reserves in order to stabilize overnight rates. Now, central banks globally have injected massive amounts of excess reserves into the system and attempt to manage those reserves by moving interest rates directly. Excess reserves are potential money supply growth, and the Fed believes it can simply pay banks to hold those reserves, avoiding inflation. In Europe and Japan, central banks are trying to use negative rates to "force" banks to lend. In other words, central banks have upped their influence over the banking system through control of even more assets.

At the same time, post-2008 banking regulations have handcuffed banks in significant ways. Central banks may have injected massive reserves, but they then offset this by forcing banks to comply with the Liquidity Coverage Ratio (LCR), which forces banks to hold enough liquidity to last a month in a significant financial and economic crisis scenario where unemployment climbs to roughly 10%.

The result? In spite of excess reserves in the system, banks can still run into liquidity problems even when they are in great financial shape.

This leaves the Fed with a dilemma. Will they relax these overly strict rules, even during short periods of stress, or will they use the repo craziness of recent weeks to justify even more Quantitative Easing?

Jerome Powell, at his press conference in September said, "I think if we concluded that we needed to raise the level of required reserves for banks to meet the LCR, we'd probably raise the level of reserves rather than lower the LCR." Once the planners fail, they end up planning and micro-managing even more. Student loan problems and the government's role in subprime loans suggests this isn't a great idea.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation.

Making the Most of Medicare's Open Enrollment Period

Retirement and Longevity

September 04, 2019

With open enrollment season upon us, ask yourself a few questions to make sure you're getting the most from Medicare.

Medicare’s open enrollment season is upon us. That means between October 15 and December 7, you are able to make changes to your Medicare Advantage plan and prescription drug coverage.

During this time, you can change from Original Medicare to a Medicare Advantage plan or vice versa or switch from one Medicare Advantage plan to another Medicare Advantage plan. You can also join a Medicare Advantage or Medicare prescription drug plan for the first time or drop your drug coverage completely.

Even if you’re satisfied with your current plan, open enrollment presents a great opportunity to make sure you’re getting the most out of Medicare. Every year you should compare your current plan to other plans in your area in case another plan offers better health and/or drug coverage at more affordable prices.

The coverage provided by insurance companies often changes each year and could result in paying more out-of-pocket on healthcare expenses throughout the year. Here are some tips to help you get started.

• Ask yourself some important questions. Have your needs changed? Is your current coverage adequate? Will the cost of your current plan be going up? Are there comparable, lower-cost plans available?

• Review the annual notice of change from your current plan provider. You should receive this in September.

• If you have a Medicare Advantage plan, make sure your doctor is still accepting your particular plan next year. If your doctor is out of network, you will have to choose a new plan or pay higher out-of-pocket costs.

• Carefully review if your plan covers your prescription drugs and what those copayments and coinsurances costs are.

• If you switch from a Medicare Advantage plan to Original Medicare, you will want to join a stand-alone Part D plan to get Medicare drug coverage.

• Compare plans using medicare.gov’s Medicare Plan Finder.

• Get one-on-one assistance from the State Health Insurance Assistance Program.

• Call the Medicare Rights Center at 800.333.4114 for free counseling.

• All changes to your Medicare plan will take effect January 1 of the next year.

Medicare decisions can be complicated. If you have any questions about open enrollment, or if you’d like to discuss how healthcare costs factor into your overall financial plan, please contact us.

Rorschach Economics

Brian S. Wesbury, Chief Economist, First Trust
Robert Stein, Deputy Chief Economist
Date: 9/9/2019

We've all heard of the Rorschach test - you know, the one where you look at an ink blot and say what you see. The theory is that it's a tunnel into someone's subconscious thoughts or desires. If you're obsessed with hockey you might look at an ink splotch and see hockey sticks, or pucks, a Stanley Cup, or even Bobby Orr; if someone is obsessed with outer space, she could look at the same picture and see flying saucers or aliens. These tests come to mind because lately, three dominant types of economic thought seem to analyze every data point and come to conclusions that always support their particular interpretation of the US economy.

One group is obsessed with President Trump's tariffs, thinking they are slowing the economy. They even search the internet and earnings calls to find mentions of "trade uncertainty" to prove their point. But uncertainty is one thing, data are quite another. Total US trade in goods and services (exports plus imports, combined) was $4.9 trillion in 2016. In the past twelve months, it's been $5.7 trillion, an increase of 16.3%. In other words, trade has grown faster than the overall economy.

Yes, we know trade tensions with China are real and important for some companies. And yes, we look forward to the US reaching an agreement with China. But the Middle Kingdom is not the be-all end-all when it comes to world trade. Supply chains are moving - trade is dynamic - which is why the costs to the US economy have been far less than static analysis predicted.

So far this year, US imports from China are down 12.3% from the same period in 2018, but imports from Vietnam are up 33.2%, and they are up 20.2% from Taiwan, 9.8% from South Korea, 9.7% from India, and 6.3% from Mexico. Meanwhile, we're confident that Congress will pass the new version of NAFTA by early 2020, facilitating stronger trade ties with Canada and Mexico. Trade is moving forward, not dying.

The second major thought group consists of those who oppose the president's policies in general and are looking for any way they can to discredit the tax cuts and deregulation. They love to focus on supposedly weak business investment, which they say signals the ineffectiveness of the president's policies.

The problem with this theory is that, since the tax cut was enacted at the end of 2017, "real" (inflation-adjusted) business investment in equipment has grown at a 3.4% annual rate, while real business fixed investment (equipment, structures, and intellectual property) has grown at a 4.5% annual rate. These are respectable numbers. It was inventories that held down GDP growth back in Q2, and this can't last with a strong consumer.

Moreover, productivity growth (the growth in worker output per hour) has accelerated, growing at a 1.7% annualized rate since the start of 2018 (and up at a faster 2.9% annualized rate so far in 2019), versus a 0.9% annualized rate for the four years ending in 2016.

The last of the three thought groups have been obsessing about the next recession since the moment the last one ended. Any day now they expect the "sugar high" to end.

They celebrated when the ISM Manufacturing index dropped to 49.1 last week, but then the ISM index for the much larger service sector surprised on the high side at 56.4. For every data point that signals a slowdown, there are nine that don't.

For example, a soft 130,000 gain in headline payroll growth for August dominated headlines, but civilian employment (which includes small business) surged 590,000, wage growth picked up, labor force participation moved higher, initial claims remained low, and auto and truck sales rose. Not exactly negative news.

If someone has an axe to grind about the US economy, we're sure they'll see a recession in whatever blot or piece of data they look at. They can always find something to worry about. Nonetheless, we continue to believe that optimism should be the default position for investors when it comes to the US.

Markets Struggle Among Geopolitical Tensions

The trade war continued in its back-and-forth fashion this month, and Washington Policy Analyst Ed Mills expects the escalation to extend volatility through the 2020 election. With an increase to 30% tariffs on $250 billion of Chinese goods slated for October 1, there is mounting urgency surrounding the next round of negotiations. Chief Economist Scott Brown notes that tariffs raise costs for U.S. consumers and businesses, invite retaliation against U.S. exports, disrupt supply chains and undermine business investment. 

 Lower short-term interest rates and an increasingly inverted yield curve have caught the attention of market observers. The Federal Reserve (Fed) lowered short-term interest rates by 25 basis points on July 31, and the central bank is expected to lower them further at the September policy meeting in light of continued trade and geopolitical tensions.

The S&P 500 was down by 1.81% this month and saw its second 5% pullback of the year. The month also ended negatively for the Dow Jones Industrial Average (-1.72%), NASDAQ (-2.60%) and the Russell 2000 Index (-5.07%).

 Here is a look at what’s happening in the markets both he­re and abroad, as well as key factors we are watching:

Economy

·         U.S. economic data have been mixed in recent weeks, says Brown, reflecting continued strength in consumer spending and weakness in manufacturing. The latest increase in tariffs is expected to have a further dampening impact on U.S. growth into 2020. 

·         Consumer spending should support overall growth in the remainder of the year, but the risks remain weighted to the downside, reflecting geopolitical concerns and trade policy.

Equities

·         Raymond James Chief Investment Officer Larry Adam reports that this August saw higher-than-normal volatility, thanks to continuing trade tensions and concerns around the yield curve. Because of these factors, defensive assets outperformed while more risky assets declined.

·         Michael Gibbs, managing director of Equity Portfolio & Technical Strategy, and Joey Madere, senior portfolio strategist, Equity Portfolio & Technical Strategy, believe that the market is in a normal back and forth pattern right now.

·         Second quarter earnings results were generally better than expected, but guidance was relatively soft. S&P 500 companies that earn more than 50% of revenues from the U.S. continued to exhibit better fundamentals. Looking ahead, S&P 500 third quarter sales estimates have held steady, but earnings estimates have moved lower as tariff impacts continue to cut into margin assumptions. 

·         Senior Vice President of Equity Research Pavel Molchanov and his team are watching the energy and environmental policies of the Democratic presidential candidates, and have found that most of those proposed would require congressional approval, making Senate control a key issue.

 Fixed income

·         The 30-year Treasury yield fell to a record low and the 10-year Treasury yield reached its lowest level since 2016, leading equity defensive sectors that are more sensitive to interest rates, such as Utilities, Real Estate and Consumer Staples, to rally. Gold was another story as the decline in sovereign bond yields and rising expectations for future Federal Reserve rate cuts pushed the precious metal to its highest level since 2014.

·         Doug Drabik, managing director for fixed income research, notes that the fall in long-term yields has contributed to further inversions of the yield curve. The spreads between the 2-year/10-year and 30-year/3-month Treasuries inverted at the end of August, while the 3-month/10-year spread has remained inverted for approximately three months. Each of these measures is widely regarded as an early indicator of a looming recession.

·         Given that the U.S. remains one of the few developed markets where interest rates are positive (global negative yielding debt recently topped $16.8 trillion), U.S. yields will remain under pressure from foreign demand. Additionally, given that positive U.S. interest rates have driven a continued appreciation of the U.S. dollar (which erodes corporate profits abroad and makes dollar-denominated debts more costly to service for foreign borrowers), the Federal Reserve remains under pressure to cut interest rates at its September meeting in an attempt to continue the U.S. economic expansion.

 International

·         The United Kingdom – and Parliament – remains split on Brexit, says European Strategist Chris Bailey. He thinks a soft compromise is the obvious solution, especially if assisted by some slight shifts from the European Union. However, this still leaves the day-to-day trade and diplomatic interactions between the UK and the European Union to be worked out, along with longer-term efforts and policies to boost pan-European economic growth levels.

 Bottom line

 ·         As trade negotiations and global affairs progress, we’ll be keeping an eye out for movements that might particularly affect investors and their financial plans.

·         The S&P 500 has buoyed in recent days, but until a decisive breakout occurs, Gibbs and Madere recommend patience with wide-scale purchases. They feel there are opportunities to be selective and accumulate individual stocks with partial positions during the market’s current consolidation phase.

Remember: The Market and the Economy Aren’t the Same Thing

Markets and Investing

August 19, 2019

The bond market flashed what many see as a caution sign – but fundamentals, prior downturn timelines and an approaching election all suggest we won’t see a recession for at least a year, says CIO Larry Adam.

The podcast below will help to understand what is going on in the market and what the future holds for the economy.

https://www.raymondjames.com/commentary-and-insights/larry-adam/2019/08/19/remember-the-market-and-the-economy-arent-the-same-thing

Ways to Prepare for – and Recognize – a Loss of Capacity

It's a difficult topic to think about, but 1 in 3 seniors may experience some type of dementia. Melissa Acayan, compliance counsel for Senior & At-Risk Clients discusses how to plan for wealth and well-being in the event of a loss of capacity. For more information view the link below:

https://go.rjf.com/2GSPiHM .

Is It Time for a Change of Plan?

Medicare open enrollment begins in October. This time presents the opportunity to make sure you are getting the most from Medicare. Here are some things to consider when reviewing your plan: https://go.rjf.com/2YMsqA7 .

Investment Startegy Commentary

Click to read the latest Investment Strategy Commentary from Raymond James Chief Investment Officer Larry Adam. https://go.rjf.com/2GXuSOa .

Weekly Market Snapshot

August 9, 2019

Market Commentary
by Scott J. Brown, Ph.D., Chief Economist

Next week, the economic calendar picks up again. The Consumer Price Index is expected to get a small boost from higher gasoline prices, which normally fall in July. Ex-food and energy, inflation should remain moderate (note that year-over-year inflation in the core CPI is trending about 0.4 percentage points higher than the PCE Price Index, which is the Fed’s chief inflation gauge). Retail sales are likely to be mixed in July, following strong results in recent months. Industrial production is expected to remain weak. Lower mortgage rates have failed to fuel a significant pickup in residential construction activity.

For more information view the link below:

https://www.raymondjames.com/newsletters/weekly_market_snapshot/nocontact.asp?id=f0000

Drip Drip Drip

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 7/31/2019

The Fed cut short-term interest rates by 25 basis points today, moving the range for the federal funds rate down to 2.00 - 2.25%. It also announced it will stop reducing its balance sheet in August, two months earlier than previously planned.

It made these moves despite better-than-expected economic data since the last meeting in June, as well as Chairman Powell's assessment at the press conference that our economic performance is "reasonably good" and the outlook is "good," as well. The Federal Reserve still claims it's "data dependent," but no one should believe it.

We don't think today's rate cut was needed, and would prefer that they continue to shrink the balance sheet. Nominal GDP is up 4.0% in the past year, and is up at a 5.0% annual rate in the past two years. Both figures stand well above the Federal Reserve's target for short-term rates. On policy, we agree with Esther George and Eric Rosengren, bank presidents for Kansas City and Boston, respectively, who dissented stating they preferred no change in rates at today's meeting.

We think cutting rates by 25 basis points was the worst possible policy outcome. If the Fed was determined to cut rates, it should have committed further – by 50 basis points or more – to tell businesses and consumers considering big-ticket purchases the Fed is planning for one-and-done. By cutting rates only 25 basis points and leaving alive expectations of further gradual cuts at coming meetings – drip, drip, drip – the Fed has created an incentive to postpone economic activity. Powell said the Fed wasn't committed to a series of rate cuts, but didn't give markets a reason to believe it. After all, at the June meeting the median interest rate projection from the Fed was for rates to remain unchanged through year-end.

The Fed's statement justified the rate cut based on "global developments" and "muted inflation." At the press conference, Powell referred to the European Union and China as points of global concern. But US monetary policy is not the tool to address these problems. Powell also suggested the Fed is concerned with a "downward slide" into lower inflation expectations. It is true that the Fed's favorite inflation measure, the PCE deflator, is up only 1.4% from a year ago. However, it's up at a 2.2% annual rate in the past three months. This is not an environment where deflation seems like much of a risk.

Putting aside whether the Fed is doing the right thing, we think the Fed is likely to reduce rates by another 25 basis points in September. In for a penny, in for a pound. The current environment remains bullish for equities, which were cheap even without rate cuts. In the meantime, holders of long-term bonds will eventually come to regret policies that mean a faster pace of inflation over the long run.

Solid GDP Report

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 7/29/2019

A cottage industry has sprung up in the past decade with the sole focus of discrediting any good news on the economy. When President Obama was in office, the attacks mostly came from the right. With President Trump in Office, the attacks mostly come from the left. Since March 2009, regardless of who was in office, we have stridently argued that this recovery has legs. The result? We have been attacked from both sides of the political aisle.

The latest debate is over real (inflation-adjusted) GDP, which grew at a better than expected 2.1% annual rate in Q2. Some say it showed soft spots from the trade war and weak business investment.

It's true that net exports (exports minus imports) trimmed the Q2 real GDP growth rate by 0.65 percentage points. But that follows the Q1 boost to growth of 0.73 points. In the past year, trade has subtracted an average of 0.58 points each quarter. For comparison, we saw larger drags from net exports in 2010, 2014, and 2015, all years without "trade wars." Our conclusion: this is statistical noise.

That leaves real business fixed investment, which declined at a 0.6% annual rate in Q2, the first drop since 2016. Many have taken this as proof that tax cuts and deregulation didn't work.

But the Q2 decline was almost entirely due to a drop in brick and mortar investment (what economists call "structures"). In the age of the Internet, software and computers are replacing brick and mortar. We buy airline tickets online, not in an office. Blockbuster was replaced by Netflix. You don't need to leave the comfort of your home, the stores come to you. As a result, investment in structures has slowed in recent years while investments in technology and equipment have continued to rise. Strip out structures, and real fixed investment rose at a 1.9% annual rate in Q2 2019.

More importantly, business investment ex-structures has clearly picked up under the Trump Administration compared to Obama's second term.

Why only use the final four years of the Obama Presidency? Because the first four years were driven by a V-shaped recovery from the Panic of 2008. His second term illustrates the impact of tax hikes and more business regulation.

Real business investment, excluding structures, grew at a 3.8% annualized rate between Q4 2012 and Q4 2016, but accelerated to a 5.9% annualized rate since Trump took office. Real Investment in software and R&D grew at a 5.5% annualized rate in the final four years of the Obama Administration versus 7.5% since the start of 2017. Tax cuts and deregulation have indeed boosted "animal spirits."

In addition, Core GDP – combining personal consumption, business investment, and home building – grew at a very solid 3.2% annual rate in Q2. Meanwhile, profit reports are widely beating expectations. The economy is much stronger than conventional wisdom thinks and has been since 2009.

Temporary Tepid Growth for Q2

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 7/22/2019

This Friday, the government will release its initial estimate of real GDP growth in the second quarter, and the headline is likely to look soft. At present, we're projecting an initial report of growth at a 1.8% annual rate.

If our projection holds true, we're sure pessimistic analysts and investors will latch onto the slowdown from the 3.1% growth rate for the first quarter, implying that we're back to slower Plow Horse growth for good. They will argue nothing has substantially changed since Trump took office, despite tax cuts and deregulation.

It's true that an annualized growth rate of 1.8% would be the slowest pace since the first quarter of 2017. But, as we will explain below, growth in the second quarter was likely held down temporarily by businesses returning to a more sustainable pace of inventory accumulation following the rapid pace of inventory building in the second half of 2018 and first quarter of this year. Excluding inventories – focusing on what economists call final sales – we estimate that real GDP grew at a 3.1% annual rate in Q2.

We also like to follow what we call "core GDP," which is real growth in personal consumption, business investment, and home building, combined. Core GDP looks like it grew at a 4.1% annual rate in the second quarter, the fastest pace in a year. In other words, while the economy may not be booming like the mid-1980s or late-1990s, the underlying trend remains quite healthy, and certainly much better than the Plow Horse period from mid-2009 through early 2017.

Here's how we get to our 1.8% real growth forecast for Q2:

Consumption: Automakers say car and light truck sales grew at a 2.8% annual rate in Q2 while "real" (inflation-adjusted) retail sales outside the auto sector grew at a 3.9% rate. Combined with some less up-to-date figures on consumer spending on services, real personal consumption (goods and services combined) looks to have grown at a 4.0% annual rate, contributing 2.7 points to the real GDP growth rate (4.0 times the consumption share of GDP, which is 68%, equals 2.7).

Business Investment: Reports on durable goods shipments and construction suggest all three components of business investment – equipment, commercial construction, and intellectual property – rose in the first quarter. A combined growth rate of 5.1% adds 0.7 points to real GDP growth. (5.1 times the 14% business investment share of GDP equals 0.7).

Home Building: After five straight quarters of contraction, it looks like home building – a combination of new housing as well as improvements – increased at a 2.6% annual rate in Q2. Expect more gains in the quarters ahead as home builders are still constructing too few homes given population growth and the scrappage of older homes. In the meantime, a 2.6% pace translates into a boost of 0.1 point to real GDP growth. (2.6 times the 4% residential construction share of GDP equals 0.1).

Government: Looks like a relatively large 2.3% increase in real public-sector purchases in Q2, which would add 0.4 points to the real GDP growth rate. (2.3 times the government purchase share of GDP, which is 17%, equals 0.4).

Trade: Net exports' effect on GDP has been very volatile in the past year, probably because of companies front-running - and then living with - tariffs and (hopefully) temporary trade barriers. Net exports added 0.9 points to the GDP growth rate in Q1, but should subtract an almost equal 0.8 points in Q2.

Inventories: Inventories are a potential wild-card, because we are still waiting on data on what businesses did with their shelves and showrooms in June. We get a report on inventories on Thursday, the day before the GDP report arrives, which may change our final GDP forecast. In the meantime, it looks like the pace of inventory accumulation got back to more normal levels in Q2, which should temporarily subtract 1.3 points from real GDP growth.

Add it all up, and we get 1.8% annualized real GDP growth. Don't let this tepid headline number spoil your day; the trend remains strong where it matters most, and prospects are bright for the US economy.

How to Beat the Market Heat

When volatility hits, keep a cool head and consider taking advantage of potential opportunities.

May 30, 2019

Periods of market volatility can trigger emotional responses in investors. When the markets are as reactive as we’ve seen lately, it can be natural to feel some apprehension, but that’s why you and your advisor have spent time developing a tailored financial plan – so that these dips, dives, rallies and recoveries can be accounted for, all while still making strides toward your long-term financial goals.

In times of uncertainty, the key is to remain focused on those goals. Certainly, how you feel about a hypothetical 10% drop could change if that drop becomes a reality. But as you prepare for market volatility or correction, trust in the planning process and review your priorities and portfolio with your advisor.

A Long-Term View

Part of the strategy, although it may seem counterintuitive, is to pay less attention to the markets and more to yourself and your financial goals. If we’re honest, we know that it’s our emotional reactions to what the markets are doing that often cause us the most trouble. For example, stock investors who simply stayed invested between 2007 and 2013 almost certainly did better than those who tried to time a very volatile market. While it’s difficult in an ultra-connected age, your investment decisions should be based on your long-term goals, not what’s happening in the markets this week or next.

What You Own and Why

Now is a good time to review your individual holdings – stocks, bonds, mutual funds, ETFs – to determine if they’re still right for you. Discuss with your advisor why you bought each security in the first place and if that reason still applies. Evaluate your portfolio as a whole to determine if you are sufficiently diversified – not just in terms of stocks versus bonds but also in terms of large- versus small-cap stocks, long- versus short-term bonds, and domestic versus overseas holdings. With your advisor, consider the current environment, where volatility is likely to continue and interest rates are likely to rise over the next few years. Think about your overall time horizon, and what you expect to happen in your personal life in the near term.

Re-evaluating Risk Tolerance

A key part of paying attention to your goals also means understanding your comfort level with movements in the market. Knowing your risk tolerance – your long-term tolerance, not how you feel when the market is soaring or skidding – can provide important perspective for creating an individual asset allocation model that’s designed to help see you through the markets’ inevitable ups and downs.

Your asset allocation model – the mix of stocks, bonds and cash designed to help you achieve your financial goals – isn’t something you set and forget. It needs to be monitored regularly to be sure it’s reflecting changes in market conditions, as well as in your personal life. You also need to stress test your model periodically to assess the likelihood that it will achieve the objectives you’ve set forth. If things are on track, fine. If they’re not, you and your advisor may have to make some adjustments – either to your goals or the model itself.

The Silver Lining

While market declines are fairly common, historically, gains have tended to follow. But you have to participate, not withdraw, to benefit from those potential gains. Investors who chose to pull their money out of equities during those down periods may have missed some of the market’s biggest gains because some of the best days came right after periods of steep decline. Also, remember that a decline can present opportunities to buy quality investments while they’re potentially undervalued. This may enable you to invest in high-quality companies at lower prices and capture additional value.

Remember:

• Selling during downturns may lock in the loss

• Pullbacks and corrections can present buying opportunities

• Fundamentally sound investments may be discounted

Staying the Course

The stock market is cyclical, and you likely will encounter numerous pullbacks and/or corrections as a long-term investor. In the long run, upturns have always been stronger than downturns.

By looking at the market over a sufficiently long period of time, we’re provided with a true testament of resiliency. When we track the overall growth the market has achieved, we learn a lesson in persistence, patience and commitment.

There is no assurance any investment strategy will be successful. Investing involves risk including the possible loss of capital. Past performance may not be indicative of future results. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Small- and mid-cap securities generally involve greater risks and are not suitable for all investors. Asset allocation and diversification do not guarantee a profit nor protect against a loss.