Hello all, we hope you had a nice June.
It was a very nice month for stocks, which rebounded solidly after a tough May.
The month was actually the best July for the Dow since 1938 and best for the S&P since 1955. Further, the S&P has had its best start to a year since 1998.
It was a very nice month for stocks, which rebounded solidly after a tough May.
The month was actually the best July for the Dow since 1938 and best for the S&P since 1955. Further, the S&P has had its best start to a year since 1998.
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Last month we mentioned how investors were leaving stocks and moving into safer investments like bonds. This pushes bond prices up and yields down – and yields were down sharply in May. This didn’t change much in June. It looks like there are still a lot of worried investors who are hiding out in bonds.
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The Fed may have played a part in investors remaining in the bond market, too.
They held a policy meeting this month and announced no changes to their policy at this time. However, they suggested they may lower interest rates again in the coming months as a response to the trade war and weakening economic data (lower interest rates make it cheaper and easier to borrow money).
The market loves stimulus, so stocks rose as a result. Bond prices would rise in the event of lower rates, too, which is why some investors remained in bonds.
They held a policy meeting this month and announced no changes to their policy at this time. However, they suggested they may lower interest rates again in the coming months as a response to the trade war and weakening economic data (lower interest rates make it cheaper and easier to borrow money).
The market loves stimulus, so stocks rose as a result. Bond prices would rise in the event of lower rates, too, which is why some investors remained in bonds.
Not surprisingly, the odds of a rate cut have risen sharply. The market is placing nearly a 100% chance of cuts at the Fed’s July meeting. As you can see in the image below, many investors are predicting multiple rate cuts this year.
As we mentioned last month, it seems absurd for the Fed to lower rates again when they are already so low. However, market indicators suggest this is the prudent thing to do to avoid a recession.
A recession indicator we’ve mentioned the last few months is to look at is the level of the yield on the 2-year bond compared to the rate the Fed has set as its target interest rate. As you can see in the chart below, every time the Fed’s rate was higher than the 2-year bond yield, a recession followed (recessions are the gray shaded areas on the chart). This occurred a few months ago and continues still today.
A recession indicator we’ve mentioned the last few months is to look at is the level of the yield on the 2-year bond compared to the rate the Fed has set as its target interest rate. As you can see in the chart below, every time the Fed’s rate was higher than the 2-year bond yield, a recession followed (recessions are the gray shaded areas on the chart). This occurred a few months ago and continues still today.
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Switching gears, economic data was mostly negative this month. They weren’t bad really, just “less good” than previous months. However, it doesn’t take long for “less good” to turn into “bad.”
Manufacturing has been a big story as it has fallen virtually all year.
Manufacturing has been a big story as it has fallen virtually all year.
Overall business conditions are falling, too.
This is leading to lower confidence among Americans. Consumer confidence numbers can signal the direction of the market, so it is something to keep an eye on.
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One of the main culprits for the malaise is the lingering trade war with China. There are hopes that some resolution to the fight will come from the G-20 meeting this weekend as President’s Trump and Xi meet.
We think the chance of a deal is extremely slim and very few are predicting this. However, we think the market will be happy if both sides leave this weekend with a positive tone. As President Trump often says, we’ll see what happens.
We think the chance of a deal is extremely slim and very few are predicting this. However, we think the market will be happy if both sides leave this weekend with a positive tone. As President Trump often says, we’ll see what happens.
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Where does the market go from here? After rallying so much this month, the upside potential from here isn’t as great. However, we don’t see a lot of red flags that would make us overly cautious. Like with the trade deal, there are a lot of outside factors that can impact the market, but we are pretty optimistic overall.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
