The recent inversion of the US Treasury yield curve has had the financial press in a bit of a frenzy.
Oxford defines uncertainty as “not completely confident or sure of something.”
There is always some degree of uncertainty for stocks.
- Stocks have a long-term upward bias, but no one can guarantee where a major market index like the Dow1 will be one year from today.
Investor sentiment is sometimes driven by what I call “heightened uncertainty.” In other words, the number of potential economic outcomes increases.
- These potential outcomes are usually to the downside.
Geopolitical issues, such as unrest in Hong Kong, can influence sentiment. Or, how might the U.S./China trade war affect the economy?
- The additional scenarios create heightened uncertainty and market volatility, as investors attempt to price in how rising trade tensions may affect the economy and corporate profits.
My goal in these weekly commentaries has been to educate, touch on important high-level themes, relay them in a conversational tone, and view events through the narrow lens of the investor. I must admit, when markets and politics collide, that goal of the narrow lens can be difficult. That said, with as much objectivity as I can muster, let’s recap recent events.
The U.S. ratchets up trade tensions by slapping a 10% levy on the final $300 billion in Chinese imports. China retaliates by weakening its currency.
The early read—the heightened uncertainty takes a toll on stocks.
Unlike prior barriers, the latest Chinese tariffs, which take effect September 1, hits mostly consumer goods.
The Federal Reserve cut its key lending rate by ¼% to 2.00 – 2.25% on Wednesday. It framed the reduction as insurance against any downside economic risks posed by weak global growth and trade tensions. It was the first reduction in the fed funds rate since the financial crisis.
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