This market rally may be the riskiest one yet

The current valuation of the S&P 500 and other indexes can only be justified if two things happen before 2020: the Federal Reserve must lower the federal funds rate and US President Trump and Chinese General Secretary Xi Jinping must reach a trade agreement. According to traders and economists alike, these events are already “priced in” to the market, meaning if they don’t happen stocks will go down.

Xi and Trump have an opportunity to show progress toward an agreement at the G-20 summit tomorrow and Friday. Leading up to the meeting, neither side has shown signs of caving under the pressure. If no compromise is reached Trump has threatened more tariffs, this time on $300 billion of Chinese goods.

The Federal Reserve meets in July and will decide then if rates are to be cut before the end of Q3. If they do not cut, the next meeting will not take place until September.  Following their meeting on June 19, traders were pricing in a 100% chance of a rate cut by the end of Q3, showing both the optimism of the market and the growing downside if their wishes don’t come through.

The next 5 weeks will have an enormous impact on the markets for the remaining half of the year. We are prepared to adjust our entire investment strategy accordingly.



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