The markets were down for the third day, with weekending numbers for the Dow at -3%, the S&P 500 -3.5%, and the Nasdaq taking it on the chin at -4.7%. The impetus for the decline was the two pronged dagger of a larger-than-anticipated trade deficit of almost $50 billion, and a rather glum report from the Fed. The markets did not take this combination well and the results were another dramatic move in a series of dramatic moves over the past several years.
There was a bit of an oddity in the trade deficit numbers. The deficit is widening while the inventory build-up is being revised lower. Usually a rise in imports on the back of stronger domestic demand leads to higher rather than lower inventories. It now appears the second quarter inventories will barely be higher than the previous quarter's $44 billion increase.
From our perspective as asset managers, this latest news pushes out our expectation of a normalization of the business cycle at least a few months. We are now expecting the Fed to keep rates near zero well into next year, possibly into the third quarter. In terms of investing, this expectation of a more extended recovery changes neither our short-term outlook nor our current sector allocations of which we've written previously.
Next week, Tuesday is a big day with Housing Starts, the Producer Price Index, and Industrial Production data on the docket, and Thursday has Jobless Claims.
Enjoy your weekend and watch for a note from us next week on deflation vs. disinflation.