Tariff deadlines loom large. Equity indexes closed the month on a high note, shrugging off headline risk and propped up by strong corporate profits, resilient consumer demand, and a tariff drama that never quite turned into disaster.
Corporate earnings, still early in the season, have surprised on the upside - particularly in Financials, where banks beat expectations on both top and bottom lines.
Economic data released in July painted a relatively resilient picture. Consumer spending remains robust and labor market data was steady, with unemployment still hovering near cycle lows.
Inflation remains stubbornly above target. Manageable, yet no comfort for the Fed.
Corporate earnings, still early in the season, have surprised on the upside - particularly in Financials, where banks beat expectations on both top and bottom lines.
Economic data released in July painted a relatively resilient picture. Consumer spending remains robust and labor market data was steady, with unemployment still hovering near cycle lows.
Inflation remains stubbornly above target. Manageable, yet no comfort for the Fed.
Rates Unchanged, Drama Continues
At its July 30 meeting, the Federal Reserve kept interest rates unchanged for the seventh consecutive time. Chairman Powell acknowledged that while inflation has moderated, the Fed is not yet confident enough to start cutting. Market consensus still points to a potential cut in September, but Powell’s tone suggested the bar remains high: “We’ll need to see more months of good inflation data.”
It’s worth noting that the meeting wasn’t routine. Two governors - Michelle Bowman and Christopher Waller, both Trump appointees - voted to cut, marking the first time since 1993 that more than one dissented.
Tariff Deadlines Loom
One of the key unresolved issues for the second half of the year remains trade policy. While markets welcomed the temporary pause on many of Trump’s proposed tariffs, that window may be about to close.
The administration’s August 1 deadlines could be a jolt to the market. Businesses are already warning of potential price hikes and supply disruptions if tariffs are reinstated.
Looking Ahead
Key developments to watch in August:
Bearish case: Pandemic savings are depleted, valuations are stretched, and September’s seasonal weakness looms. A few strategists expect flat or negative returns into year-end.
Bullish case: Recession risk is down, inflation is easing, and AI tailwinds persist. Fundstrat’s Tom Lee: “Most of our institutional clients are skeptical of this recovery because they feel there is still looming uncertainty... [But] markets don’t peak when investors are skeptical, they peak when there’s over-exuberant enthusiasm. There’s no sign of that now.”
Final Word: August will test the durability of the rebound as second-half earnings guidance rolls in and Washington’s trade negotiations approach their next inflection point. For now, the market is giving investors the benefit of the doubt - but history suggests August can turn from calm to choppy in a heartbeat.
And For What It’s Worth…
In Key West, Florida, a motorist stopped at an intersection to "let a chicken cross the road" when another driver honked at her and then drove past her, running over and killed the bird. A suddenly enraged motorist #1 followed motorist #2 – caught up with her and tried to open her car door. Amid the struggle, enraged motorist #1 pulled out her bear mace and sprayed motorist #2 directly in the face while she sat seated in her car, later telling officers she just wanted to "teach her a lesson."
Motorist #1 is now facing assault charges. [People.com]
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
At its July 30 meeting, the Federal Reserve kept interest rates unchanged for the seventh consecutive time. Chairman Powell acknowledged that while inflation has moderated, the Fed is not yet confident enough to start cutting. Market consensus still points to a potential cut in September, but Powell’s tone suggested the bar remains high: “We’ll need to see more months of good inflation data.”
It’s worth noting that the meeting wasn’t routine. Two governors - Michelle Bowman and Christopher Waller, both Trump appointees - voted to cut, marking the first time since 1993 that more than one dissented.
Tariff Deadlines Loom
One of the key unresolved issues for the second half of the year remains trade policy. While markets welcomed the temporary pause on many of Trump’s proposed tariffs, that window may be about to close.
The administration’s August 1 deadlines could be a jolt to the market. Businesses are already warning of potential price hikes and supply disruptions if tariffs are reinstated.
Looking Ahead
Key developments to watch in August:
- Inflation Reports: Core PCE and CPI releases will be crucial in shaping expectations for the September Fed meeting.
- Jackson Hole Symposium: In late August, Powell will face an audience with sharp pens. Any hawkish tone could spook markets anticipating cuts.
- Trade shock scenarios: New or extended tariffs from the Aug. 1 deadline could alter price expectations - tipping inflation tone or corporate margins.
Bearish case: Pandemic savings are depleted, valuations are stretched, and September’s seasonal weakness looms. A few strategists expect flat or negative returns into year-end.
Bullish case: Recession risk is down, inflation is easing, and AI tailwinds persist. Fundstrat’s Tom Lee: “Most of our institutional clients are skeptical of this recovery because they feel there is still looming uncertainty... [But] markets don’t peak when investors are skeptical, they peak when there’s over-exuberant enthusiasm. There’s no sign of that now.”
Final Word: August will test the durability of the rebound as second-half earnings guidance rolls in and Washington’s trade negotiations approach their next inflection point. For now, the market is giving investors the benefit of the doubt - but history suggests August can turn from calm to choppy in a heartbeat.
And For What It’s Worth…
In Key West, Florida, a motorist stopped at an intersection to "let a chicken cross the road" when another driver honked at her and then drove past her, running over and killed the bird. A suddenly enraged motorist #1 followed motorist #2 – caught up with her and tried to open her car door. Amid the struggle, enraged motorist #1 pulled out her bear mace and sprayed motorist #2 directly in the face while she sat seated in her car, later telling officers she just wanted to "teach her a lesson."
Motorist #1 is now facing assault charges. [People.com]
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
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