“There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don't know we don't know… it is the latter category that tend to be the difficult ones” - Donald Rumsfeld
As of the end of the second quarter, “known knowns” include sustained economic expansion tempered by softness in US economic data - particularly in business investment, below-target inflation levels and a 2-10 year yield curve slope that’s bordering on inversion.
Perhaps the most important “known unknown” is monetary policy. In the US, futures markets are pricing in 75 bps of easing by year end, but the Federal Reserve has been careful to state that any decision will be data dependent. The European Central Bank has signaled its willingness to cut rates and resume bond purchases in reaction to any further growth slowdown. Geopolitics continues to drive episodic volatility, as do escalating tensions with Iran and a supposed October 31 Brexit deadline.
Against the backdrop of decidedly dovish global monetary policy, most economists believe that the record-long US economic expansion is entering the late stage of the cycle, but that there is limited near-term risk of recession. It is not clear, however, that looser monetary policy can offset the effects of a trade dispute-driven negative supply shock.
By definition, we won’t be enumerating the “unknown unknowns”, which is a powerful argument for maintaining a diversified portfolio and managing risk. As always, we encourage you to discuss this with your advisor. If you’re not a client, contact us for a second opinion.
View our Q2 2019 Market Review.
J. Brent Everett
Chief Investment Officer
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