The Dow 30 Industrial Average and the S&P 500 are relatively near their all-time highs. The 10-year United States Treasury Bond has recently traded below 2.00%. These low interest rates are against the backdrop of some countries in Europe experiencing negative interest rates. In Germany for example, you may deposit funds for a committed period of time and receive less back than your original deposit – a concept that is very foreign to an American investor. It is easy to see why the United States Markets have attracted a lot of money to our shores. Our equity markets are up and at least our bonds pay a positive rate of return and are considered very high quality.

So, what does our future hold? Obviously, I try to speak in possibilities and probabilities and the next big question is will the U.S. Federal Reserve (Fed) cut interest rates? After last cutting rates in 2008, the Fed started hiking rates in 2015 and has raised them a total of nine times since then. Now, amid the longest economic expansion ever recorded in U.S. history, the bond market is aggressively pricing in not one but two rate cuts this year. This is why interest rates have been dropping.

Although the bond market may be overdoing it by pricing in two rate cuts this year, the latest growth and inflation data, along with U.S. – China trade tensions, provide cover for the Fed to lower interest rates this summer. In particular, the May jobs report was soft, inflation is below the Fed’s target and falling, and headlines suggest that a trade breakthrough at this week’s G-20 meeting in Japan has become increasingly difficult to achieve.

Bottom line, LPL Research believes Chairman Powell will probably signal that a cut is likely coming in July. Fed policy is currently too tight for a prolonged trade war, while the bond market is forcing the Fed’s hand to an extent, amid slowing growth and depressed interest rates globally.

If the Fed begins to cut rates in July, will it be enough to hold off a recession? LPL Research believes this is possible and expects stocks to applaud an eventual cut. Trade disputes could throw a wrench in the plan, but additional economic pain experienced by both the U.S. and China could bring the two sides together to strike some sort of deal this summer.

Lastly, markets are starting to recognize value in emerging market equities. Since May 17, the MSCI EM Index has returned 6%, ahead of both the MSCI EAFE Index (2.7%) and the S&P 500 Index (2.1%). The U.S. dollar has weakened with a potentially more accommodative Fed which would be good for EM equities. Thank You and I wish all you a happy 4^th of July Holiday! – Mark

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Economic forecasts may not develop as predicted. Some of this research material has been prepared by LPL Financial. All indices are unmanaged and may not be invested into directly. Referenced material: LPL Research Weekly Market Commentary and LPL Research Weekly Economic Commentary, both dated June 17, 2019.  Approved Tracking #:  1-867858.