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  • US Consumer – Still Strong, Best is Behind Us
    • Expected to contribute 1.5% (solid) of GDP growth, chugging along at 2%ish spending clip
    • Nothing related to the consumer on the horizon that would force the Fed’s hand one way or the other.
    • From the consumer standpoint, it is difficult to paint a recessionary picture for the next 6-12 months
    • Debt capacity/access to debt is still generally positive
  • Political Landscape – Gridlock with Caution, But Could Get Worse
    • The House has passed bills to:
      • Lower prescription drug prices
      • Protect pre-existing conditions
      • Nine bills on veterans issues
      • Four environmental related bills
      • Five bills related to the military and foreign affairs
      • They are all DOA when they reach the Senate, let alone getting to the President’s desk
    • New budget deal – spending set beyond the 2020 elections (to make both parties look “good”), budget deficit and debt ceiling warnings have proven to be completely worthless
    • USCMA (formerly NAFTFA) vote expected in Fall 2019
      • “I’m optimistic that we have a very good chance of getting that through.” – Larry Kudlow (Source: CNBC)
      • Democrats + Republicans involved both acknowledge meetings have been “open, constructive & successful” (CNBC)
    • Trade talks have restarted between US & China.
      • Chinese economy has slowed to 6.2%, its weakest rate in 27 years.
      • Cumulative impact on annual growth due to tariffs on China approximately 1.5% (Source: IMF, Bloomberg)
    • Infrastructure: Not likely to happen according to Chief of Staff Mick Mulvaney. R’s &D’s most likely to work on:
      • Raising debt ceiling (completed as of 7/23/19)
      • Passing a budget
      • Get USCMA approved
    • Information Technology: Washington vs. Silicon Valley
      • Has the tech industry grown too powerful?                     
        • Facebook recently fined $5B by FTC for violating promises made to improve privacy practices
      • Cryptocurrency
        • Facebook’s LIBRA and regulation thereof has come under scrutiny by the government due to proposed implementation
      • Peter Thiel and others have accused Google of censoring conservatives
  • Earnings – Second Quarter Not as Bad as Originally Expected (So Far)
    • …But still weak (-2.6% blended EPS growth YoY per FactSet as of 7/26/2019)
    • Low-single digit YoY growth for 2019 (Source: FactSet)
    • Sales up low single digits: 4% (Source: FactSet)
    • Banks who have reported are saying their clients have spent most of the year sitting on the sidelines (Goldman Sachs, Citi, and Morgan Stanley).
    • Things will be stable or accelerate during 2nd half of the year (Trading/Mergers & Acquisitions front).
    • All their (banks referenced above) guidance based on 1-3 rates cuts rest of the year.
    • Stock example:
      • Fastenal: Eating half of the supply chain cost pass-thrus.
        • Experienced first sub 10% growth in 9 quarters. An increase in tariffs means inflation.
        •  Customers paying slower. Inventory too big. The company stockpiled prior to tariffs being implemented and now can’t get rid of it.
    • Consensus is slowing, but not dying
    • Management teams don’t want to take action (they control labor, capital expenditures, and wages)
      • Anyone sourcing from off-shore is hurting.
    • It doesn’t look like earnings will get to the high single digits number many thought       for 2019.
  • US Federal Reserve – Don’t Fight the Fed, Because the Fed Isn’t Fighting Other “Feds”
    • During the July 30-31 meetings, the Federal Reserved decided to cut interest rates by 25 basis points
    • We believe there will be 1 more rate cut, possibly 2, this year (25bps each); US 10 yr. at 2% (-) on Oct. 1
      • However, the Fed’s choice to cut rates is confounding many other asset managers (including us) as to the rationale
      • The best answer might be the Fed doesn’t want to fight other central banks, who appear to be committed to easing rather than further tightening
    • The Fed announced in March 2019 its desire to end its balance sheet runoff program in September 2019, yet at the July 30-31 meeting, decided to cease the program early
  • Real Estate – How Much are Lower Rates Helping?
    • Neutral to modestly positive outlook; this area won’t be a huge driver of the economy but contributes to overall growth. Prices are high across the board but have been higher in past cycles.
      • Housing starts could remain flat/stable YoY w/ potential surprise to the upside
      • US existing home sales growth rate fell in 2018, but have rebounded nicely thus far in 2019
      • Price outlook is more negative for upper-income households
    • According to YCharts, the US 30 yr. mortgage rates started the year at 4.51%, but have since fallen by approximately 76bps to 3.75% (as of 7/25/2019)
    • Despite falling mortgage rates, existing home sales fell in June for the 16th month in a row.
      • In the monthly press release, Lawrence Yun, the National Association of Realtors chief economist noted, “Home sales are running at a pace similar to 2015 levels – even with exceptionally low mortgage rates, a record number of jobs and a record high net worth in the country… Imbalance persists for mid-to-lower priced homes with solid demand and insufficient supply, which is consequently pushing up home prices… Either a strong pent-up demand will show in the upcoming months, or there is a lack of confidence that is keeping buyers from this major expenditure. It’s too soon to know how much of a pullback is related to the reduction in the homeowner tax incentive.”
      • At a briefing in Washington, Yun also commented “Sales refuse to break out higher” noting “it doesn’t make economic sense” given the backdrop of job creation, rising wages, and strong equity market returns.
    • Housing starts: We had unwanted inventory at the end of 2018 which was  followed by a bounce back in 2019 (also low rates helped)
      • Could end up flat to slightly positive from a housing starts perspective.
    • Home prices: much more negative price outlook from higher income household; different than what we’ve experienced in the past.
    • Mortgage originations picked up with the bulk of these seeming to be to be refinance driven. There has been growth from young adult population growth (some states are winners and some are losers). Stable to possibly mild improvement going to the end of the year

      Sources: National Association of Realtors (NAR), US Census Bureau

  • Europe – Muddling Along as Usual, No Change in Outlook
    • More likely than not we get a rate cut (sending benchmark rates even more negative) this year, possibly this quarter
    • Europe in a muddle along, but does the changing of leadership (LaGarde replacing Draghi at the ECB, Boris Johnson as the new UK PM) provide an opportunity for stronger growth and higher equity prices?
    • GDP growth Examples: Germany / Italy poor.
      • Overall half of US (U.S around 2%, Germany around 1%)
    • Most countries have negative rates except for Greece
    • Spread between US and Europe 2%+
    • Currency rates: dollar has strengthened 4% over everything else; this corresponds with the US having higher GDP and higher interest rates
    • Through July 29, US markets are up approximately 21% and Europe up 14-15% (Source: YCharts). All of this a bounce-back from the misery of Q4 2018
      • Is this sustainable? There is a very high correlation between equity markets regardless of differences in GDP/rates, etc.
    • ECB even looser than US ECB buying all sovereigns and putting pressure on corporates, so the only other option is to buy the equities.
      • Banking sector in trouble. They could lose a name or two in the next 12 months (Deutsche Bank in trouble)
      • Stuck in a rut of super low growth. Can they fall off a cliff without actually falling off the cliff?
    • Disappointing June (Flash) PMIs across the board (IHS Markit):
      • Germany Manufacturing PMI falls to 43.1, an 84-month low
      • Eurozone Manufacturing PMI falls to 46.4, a 79-month low
      • Composite PMIs in Germany, France, and the broader Eurozone all fell MoM and YoY into the low(er) 50s, indicating very tepid growth.
  • Emerging Markets – No Change in View, Still Not a Dynamic Story

Strategy Outlook and Forecast Detail

  • We remain generally cautious with an eye towards holding onto strong YTD gains
  • After robust discussion, we have decided not to make any changes to the current model allocations
  • The decision-making process is fluid and we will notify you once our thinking has changed

DISCLOSURES

The information in this Market Commentary is for general informational and educational purposes only. Unless otherwise stated, all information and opinion contained in these materials were produced by Foundations Investment Advisers, LLC (“FIA”) and other publicly available sources believed to be accurate and reliable.  No representations are made by FIA or its affiliates as to the informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. No party, including but not limited to, FIA and its affiliates, assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.

The views and opinions expressed are those of the authors do not necessarily reflect the official policy or position of FIA or its affiliates.  Information presented is believed to be current, but may change at any time and without notice.  It should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. You should consult with a professional advisor before implementing any strategies discussed. Content should not be viewed as an offer to buy or sell any of the securities mentioned or as legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation.
Investment advisory services are offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.