Weekly Investment Strategy

August 16, 2019

Key Takeaways

  • In a tribute to Woodstock, markets could use ‘Three days of peace and music’
  • Markets may need a ‘little help’ from President Trump and Fed Chair Powell
  • An inverted yield curve starts the ‘shot clock;’ don’t panic

This week marks the fiftieth anniversary of the generation-defining Woodstock Festival. It was billed as ‘Three Days of Peace and Music,’ clearly something we could all use after the last two tumultuous weeks in the financial markets! Aside from iconic musical performances, Woodstock is also remembered for its crowds and inclement weather.

  • Overcrowding | What was supposed to be a 50,000 person ticketed event evolved into a 400,000 person free concert on a farm in Bethel, New York. Overcrowding, or extreme levels of bullishness, can be a negative for equities. Elevated levels of bullishness exhibited in early August have reversed as the S&P 500 has fallen 6% from its highs. This has subsequently become a near-term positive for the equity market.
  • Inclement Weather | Despite torrential thunderstorms, the festival persevered as most ignored the weather and focused on the history-making musical performances. Similarly, investors need to focus on their long-term goals and the underlying fundamentals of the market and disregard the daily deluge of negative headlines.

Turning to the music, many of the great songs performed at Woodstock connect to the current state of the financial markets:

  • With a Little Help From My Friends | Two people that could be a ‘friend’ to the market are President Trump and Fed Chair Powell. The president could help market sentiment by alleviating the concerns around the potential for increased tariffs with China, Europe, and Japan. While the postponement of some of the Chinese tariffs until December 15 is a start, a more permanent declaration of a trade truce would serve as a catalyst for equity markets. While the Fed did cut interest rates at its July FOMC meeting, it was more coy about its commitment to further rate cuts, which disappointed the markets. As a result, the market will likely react strongly to any clues released at the Jackson Hole Economic Symposium starting next Thursday (August 22). This is especially true as we approach the September FOMC meeting, given that the futures markets are pricing in a 94% probability of two or more rate cuts and a 65% probability of three or more rate cuts by year end.