Let the Hunger Games Begin
This week we saw the first round of presidential debates and had the pleasure of watching 20 Democratic candidates speak over each other in heated argument over two nights. The top contenders according to polls (if the last presidential election is any indication, these polls are about as trustworthy as my latest Buzzfeed quiz that categorized pea soup as “the most fun”) are Joe Biden, Bernie Sanders (SOS, socialism is not the answer), Pete Buttigieg, Kamala Harris, and Elizabeth Warren. As Democrats identify the candidate best suited to dethrone Trump, dramatic policy changes on immigration, healthcare, and the environment are expected to be quite topical.
Moral of the story: Top contenders’ stances on policy can be expected to have a direct impact on stock performance – healthcare policy impacting drug makers, environmental policy impacting energy companies, etc. – similar to Trump’s increased defense spending acting as a tailwind for defense contractors. The market is about to start reacting to so many tweets, Godspeed.
Counting on Consumers
Consumer spending increased 0.4% in May and April figures were doubled from 0.3% to 0.6%. May’s print marks three months in a row of steady increases in consumer spending with spending increasing specifically for vehicles, hotels, and food. Moreover, incomes rose 0.5% for the second month in a row, providing support for increased household spending. Inflation, however, inched lower again as the PCEdropped from 1.6% last month to 1.5% in May, falling further below the Fed’s 2% target.
Moral of the story: Waning inflation has provided support for those calling the Fed to cut rates as soon as July. While consumer spending seems to still be healthy, a drop in confidence could cause consumers to close this spigot and consumer confidence fell to almost a two-year low for June because of worries around trade and the May jobs reports. If consumer confidence also begins to drop to concerning levels, it could add additional pressure on the Fed to act.
Predicting Policy
Speaking of Fed policy, the market has been trying to figure out what type of policy change (if any) we’re going to see from the FOMC in the upcoming July meeting. While some might argue the record-low unemployment should give the Fed reason to continue on its current policy track, others would point to slowing economic indicators, global uncertainty, and, most importantly, diminishing inflation to call for up to a 0.5% cut in interest rates. However, commentary from Fed President Jerome Powell and St. Louis Fed President James Bullard this week seemed to dispel hopes of a 0.5% cut as the FOMC continues to monitor global conditions, which sent stocks lower.
Moral of the story: It seems silly for the Fed to comment on any policy changes ahead of the G20 summit this week given the potential for some resolution with China on trade. Trump and Xi met on Saturday and while we haven’t heard of a deal yet, Trump has agreed to hold off on issuing new tariffs, let Huawei buy US products, and proceed with further trade negotiations. These might be baby steps in comparison to a full-fledged deal, but at least they’re baby steps in the right direction.