Key Takeaways
- After slowing to 4% in Q1, the initial reading of U.S. economic growth for Q2 surprised to the upside and came in at 2.8%, beating the consensus estimate of 2.0%.
- The labor market continues to demonstrate signs of weakening as the July unemployment rate climbed to 3%, up from 4.1% in June, marking its fourth consecutive increase. Job growth also disappointed as the economy added 114,000 jobs, well below the expected 175,000.
- Inflation, as measured by the consumer price index, continues to moderate after briefly spiking in Q1, providing some relief to households as consumers have also shown signs of weakness in recent months.
- Markets are now pricing in a 100% chance of a September rate cut, with focus turning to whether it will be 25 or 50 basis points. Confidence in a cut was boosted after the July FOMC meeting when Fed Chair Powell finally turned dovish by stating a September cut is now “on the table”.
- Equity markets finished mixed in July, but the biggest story of the month was the 5% surge in the Russell 2000 as money started to rotate out of richly-valued tech stocks and into small-caps, which had been out of favor for several years.
- The beginning of August, however, was marked with heightened global volatility and a sharp selloff as S. recession concerns were ignited by the underwhelming July employment data and the Bank of Japan raising its policy rate from effectively zero spooked investors and unwound a popular carry trade used by hedge funds.
- Many economists, on the other hand, feel that fear of an impending recession is premature and point to persistent GDP growth and unemployment remaining below its historical average to support their argument.
- With election and geopolitical uncertainty on the rise, and talk of a coming S. recession dominating headlines, volatility may persist throughout the back half of the year. One of the best defenses for investors remains diversification and ensuring investment portfolios are properly aligned to long-term financial goals.
