Stocks advance again before Fed takes precautions

Mike Loewengart, Vice President of Investment Strategy

E*TRADE Capital Management


Amid a crescendo of economic concerns, the equity markets showed continued resilience in July. Trade tensions, decelerating industrial production, and slowing GDP growth couldn’t stop the market’s momentum as investors waited for the Federal Reserve’s next move.

Although the decade-long expansion became the longest on record last month, the Fed has become concerned enough about economic growth prospects that it pared interest rates for the first time since 2008 at its July policymaking meeting.

US equities

After climbing to new highs in June, stocks rode another wave of optimism throughout much of July. Hopes for a Fed rate cut propelled the markets before second-quarter earnings and guidance began sorting winners from losers.

July 2019 US equity performance

FactSet Research Systems

In July there was notable dispersion between the tech stocks of the NASDAQ Composite Index, which was up more than 4% by July 26, and small caps, which were underwater for much of the month before scratching out a small gain. That could change, however, given that companies with greater international exposure are generally showing larger second-quarter earnings declines than their smaller, more domestically focused counterparts.1

July 2019 sector performance

FactSet Research Systems

International equities

On the heels of solid gains in June, international stocks took a turn for the worse in July, with both developed and emerging market shares losing ground amid moderating expectations for global growth. The International Monetary Fund has cited trade tensions, technology supply chain disruptions, and mounting debt loads as downside risks to international stocks.2

Nonetheless, many international stocks have posted double-digit returns year-to-date, and monetary easing in the US could prove beneficial to emerging markets if declining rates pressure the US dollar. A weaker dollar would reduce the relative value of dollar-denominated debt owed by countries in the developing world.

July 2019 international equity performance

FactSet Research Systems

Fixed income

Bonds have benefited from continued strong asset flows into fixed income funds, which have seen nearly 30 consecutive weeks of inflows.

Before the Fed chopped interest rates, Treasury yields began to stave off their gradual decline. Although yields on the 10-year Treasury note fell briefly below 2% for the first time since 2016, they ended July little changed at just over 2%. 10-year Treasury yields are down 100 basis points from last November, when they were still hovering above 3%.

Looking ahead

With the Federal Reserve’s first rate cut since 2008 in the rearview mirror, investors now have a brief respite to focus on other pressing issues. But Fed-watching isn’t behind us just yet.

•  Will the Fed cut again? Fed policymakers will next meet in mid-September, and they could take a hatchet to short-term rates yet again. While prognosticators will start weighing in immediately, the Fed’s decision could hinge on any number of longer-term variables, including inflation, trade developments, and international growth concerns.

•  Renewed search for yield: With rates moving lower, income-oriented investors could be tempted to look beyond high-quality bonds in their hunt for yield. That could bode well for dividend stocks and high-yield bonds.

•  Q2 earnings: Investors are also still digesting the tail-end of second-quarter corporate earnings season. So far, more than 75% of S&P 500® firms have reported postive earnings surprises, but earnings are still expected to be down from last year’s levels. If that trend continues, it would mark the first time since 2016 that S&P 500 constituents have reported two straight quarters of year-over-year earnings declines.

With the economy sending mixed signals, the coming months will be telling. We now have a better handle on the Fed’s monetary stance, but any number of developments could shift the economic winds.

Thanks for reading, and we’ll talk to you again next month.

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1. FactSet Research Systems “Earnings Insight,” July 26, 2019,

2. International Monetary Fund, “World Economic Outlook,” July 2019,

Mike Loewengart
Managing Director, Investment Strategy, E*TRADE Capital Management, LLC

Mike Loewengart is the Managing Director of Investment Strategy for E*TRADE Capital Management, LLC. Mike is responsible for the asset allocation and investment vehicle selections used in E*TRADE’s advisory platforms. Prior to joining E*TRADE in 2007, Mike was the Director of Investment Management for a large multinational asset management company, where he oversaw corporate pension plan assets. Early in his career, Mike was a research analyst focusing on investment manager due diligence for the consulting divisions of several high-profile investment firms. Mike holds series 7, 24, and 66 designations, as well as the Chartered Alternative Investment Analyst (CAIA) designation. He is a graduate of Middlebury College with a degree in economics.

Andrew Cohen, CFA
Senior Director, Investment Strategy, E*TRADE Capital Management, LLC

Andrew Cohen is the Senior Director of Investment Strategy for E*TRADE Capital Management, LLC. Prior to joining E*TRADE, Andrew was the Director of Investments and Operations for a large Registered Investment Advisor, where his responsibilities included investment manager research, asset allocation, and portfolio construction. Previously, he was a Senior Research Analyst and Team Leader for a leading wealth management platform. He is a CFA® charterholder and a member of both the New York Society of Security Analysts and CFA Institute. He is a graduate of Virginia Tech with a BS in finance.

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