To say June was a good month for stock market investors would be a big undersell of what actually happened. All the major indices we follow, including the global indexes, posted gains of more than 6%. In an unusual twist, bonds and commodities posted strong gains as well. The U.S Dollar was the lone loser for June.
U.S. & International Stock Index Returns
|Index June 2019 Year-to-Date|
|Dow Industrials 7.65% 14.03%|
|S&P 500 7.57% 17.35%|
|S&P 400 (Midcap) 8.12% 16.99%|
|S&P 600 (Small Cap) 7.65% 12.82%|
|MSCI World 7.01% 15.63%|
|MSCI EAFE 6.10% 11.77%|
|Bloomberg Agg. Bond 6.11%|
|CRB Commodity Index 6.62%|
|US Dollar Index 0.23%|
All data as of 06/30/2019, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
Best June for the stock market since 1955. All of the major indexes we follow were up strong on the belief that there will be multiple interest rate cuts coming in the second half of the year. Ironically this is a result of weakness in the economic numbers, not a belief that the economy is growing at full tilt or that corporate earnings will be outstanding. Sometimes in investing what is bad is good, and what is good is bad.
The drop in bond yields that began in November 2018 did not let up in June as the 10-year Treasury ended the month at 2.00% and the Bloomberg Barclays Aggregate Bond Index gained 1.32%. Year-to-date the index is now up 6.11%. Given the strong performance of the stock market in 2019 we are surprised at the strength in bonds, as history tells us that the two markets are not usually correlated.
June was a negative month for the U.S. Dollar Index as it was down 1.31% to a six month gain of just 0.23%. The weakness is notable because, from a technical point of view, the dollar broke below a rising wedge pattern and suggests continued weakness for the dollar. It is not lost on us that this weakness is occurring as President Trump appears to be backing away from the threat to increase tariffs on China.
This change has implications for every market we follow – the stock market, bonds market, commodities – as well as global trade. We should also note that the index’s move higher in April 2018 coincide with the initiation of the trade dispute/tariff war with China.
The CRB Commodities Index regained a big part of its May losses by posting a 3.34% gain for the month. Oil, as one would expect, was again a factor. From a big picture perspective, however, we view the day-to-day, month-to-month moves as market noise, given the trading range the index has been in since the middle of 2015. Gold, on the other hand, is telling a much different story.
Sometimes viewed as an alternative to currencies, globally thought of as a storage of value in times of crisis, the yellow medal has broken above the technically important 1350 level and out of a 6-year price consolidation. While the weaker dollar is a factor, we think there may be something bigger happening. Gold has historically been non-correlated to the stock market (if stocks goes up, gold goes down and vice-versa). There are periods of time where this is not the case, right now being one of them. It can go on for a while. Our view is that unless “this time is different,” the resolution this aberration will eventually be either gold price breaks down or the stock market reverses lower.
A big theme for us at this time is the unusual situation where stocks, bonds, and commodities are all making gains. When assets that do not normally correlate start to move in concert something is not 100% right. We are now in the longest official economic expansion in US history. Stocks are agreeing with it but falling bond yields are telling us a story of concern. The breakout in gold is also questioning how long this expansion can last. For now, the good times are rolling and are likely to continue.
Much of what we said in our May 2019 post remains true today – to the casual observer asset prices are increasing so everything is good but under the surface there is reason for concern. US-China trade tensions have entered a sort of detente, with President Trump announcing that new tariffs won’t be imposed on China at this time. No escalation is good, yet no vision for a resolution leaves the door open for a policy reversal in the form of a late-night tweet.
One of the effects of the current trade policy has been a slowdown in the global economy. According to JP Morgan Asset Management manufacturing momentum has been slowing all year, a big change from a year ago when the global economy was firing on all cylinders. It is not hard to connect the dots and conclude that a continuation of this trend would put the economic expansion in jeopardy.
Which is where the issue of interest rates comes in. Pressure has been building from seemingly everywhere for the Governors of the Federal Reserve to cut short-term interest rates. The basic argument is that Powell and company face a slowing economy and they need to react to prevent a recession before it happens. The counter argument is that real interest rates are low (barely positive) for the end of an economic cycle and there is already a lot of stimulus in the economy.
As we enter July the basic argument is winning on Wall Street with the stock market pricing in three rate cuts of a quarter of 1% for 2019. Fed Chair Jerome Powell punted on the issue at the June meeting wanting to see what the latest economic data produces before they make a rate cut decision. Before the July meeting there will be a lot more information for consideration.
Which leads us to the risk in the market as we see it. “Don’t fight The Fed” is some well heeded advice. With the market projecting three rate cuts the natural pressure is for higher equity prices. Put another way, lower interest rates are desirable because it should stimulate the economy, which leads to higher corporate profits. Higher earnings = higher stock prices over the long-term.
But what if the market has it wrong? What if, we get no rate cut in July? Or, what if we get a July rate cut and that is it?
“Don’t fight The Fed.”
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Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents
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Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
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