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Stocks End Week Only Modestly Lower After Rough Start

Stocks closed lower on Friday and for the week. But the end-of-week losses were modest (approx. -0.60%) compared to how the week began (approx. -3%).

Actually, the pullback started the week before when the Fed cut rates as expected, and ended their quantitative tightening two months ahead of schedule.

That was decidedly bullish for the economy and the markets. So was their released policy statement which indicated they are open to more rate cuts in the coming months.

But somehow, Fed Chair, Jerome Powell's comment that this was "not the beginning of a long series of rate cuts", got twisted into meaning this was the end of the cuts.

Such nonsense.

How does one reconcile the two ideas of being open to more rate cuts, and this not being the beginning of a long series of rate cuts?

Easy.

A few rate cuts, by definition, is not a long series.

We just came off of a long series of rate hikes. A total of 9 rate increases over the previous 3 years. That's a long series.

But 2 to 3 cuts over a handful of months is not!

And already the odds are at 74% that we get another rate cut in September, with the likelihood increasing that we get a third in October or December.

Sanity took hold and the markets began rebounding the next day, up until it was announced that the U.S. would be placing tariffs on an additional $300 billion of Chinese goods on September 1st, ahead of the next scheduled trade talks later that month.

But that should not have come as a surprise, since President Trump had said he would do this if he wasn't happy with the progress or pace of the talks.

Actually, those additional tariffs were supposed to go into effect at the end of June. But they were postponed ahead of President Trump and President Xi's meeting at the G20 summit.

Since then, trade talks had resumed and concluded a couple of weeks ago, with more talks scheduled for September. And while they were considered constructive, there was no new breakthrough. So the administration put China on notice that the additional tariffs were going on.

While this could very well be a negotiating tactic, only to suspend them ahead of the next meeting, nobody doubts that the administration will impose them if necessary.

But the hysteria that followed was terribly misguided and overdone.

For one, no new tariffs are going on until September 1st at the earliest.

And the impact on our economy, if and when they go on, is expected to be modest at just a half percent. (Although it's expected to knock a full percent off of China's GDP.)

In the meantime, the U.S. economy is strong with our GDP tracking at an annual pace of 2.6%. Unemployment is near record lows. Consumer confidence is near record highs. Corporate earnings continue to impress. And interest rates remain near historic lows and poised to go even lower.

And it would take a lot more than a half percentage point reduction to hurt this economy. In fact, we'd still be growing at a faster pace than the first 8 years of this recovery, and faster than the average annual GDP of this whole expansion.

Let's be clear. Both countries want a deal. And it could be argued that China wants/needs a deal more than the U.S., given that China's economy is growing at the slowest pace in nearly 30 years.

But it's clearly going to take a little more time.

Quite frankly, many believe the ratification of the upcoming USMCA deal is more important than the trade deal with China at this point. And it looks like there's widespread support for that going through.

The point is, the U.S. economy will be just fine.

Could we be growing faster? Sure we could. It's believed our GDP could be at 3% if interest rates were lower. But the Fed is already working on making that happen.

Nonetheless, our economy remains the envy of the world. The underlying fundamentals are strong. And the Fed remains committed to ensuring the economic expansion continues.

And that's good news for the economy and the market.

See you tomorrow,

Kevin Matras

Executive Vice President, Zacks Investment Research

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