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Stocks Finish the 1st Half of the Year Strong For the week of July 1, 2019

Key Market Data

06/21/2019 06/28/2019 One Week Change YTD One Year
S&P 500 Index 2,950.46 2,941.76 -0.29% +18.54% +10.50%
MSCI EAFE Index 1,911.18 1,913.83 +0.14% +14.53% +2.74%
Barclays Capital U.S. Aggregate Bond Index 2,162.42 2,171.71 +0.43% +6.11% +7.91%
10-year Treasury Note Rate 2.056% 2.006% -5.0 basis points -67.9 basis points -83.1 basis points

Despite finishing slightly down last week, stocks closed June with one of the best performances in decades. Late week concerns over the meeting between President Trump and China’s President Xi Jinping in Japan on Saturday weren’t enough to overshadow faith in the flexibility of the Federal Reserve. In addition to the strong June, the major indexes finished up sharply for the first half of 2019. The S&P 500, up 7.1 percent last month, had its best June since 1955, and the Dow advanced 7.3 percent, its best June since 1938. At the midyear point, the Dow has gained 15.4 percent, the S&P 500 18.5 percent and the Nasdaq 21.3 percent. At the same time, the yield on the 10-year Treasury closed below 2 percent last week for the first time since late 2016, before rebounding to finish at 2.006 percent.

On Saturday, Presidents Trump and Xi had their much-anticipated meeting on the sidelines of the Group of 20 meeting in Osaka, Japan. While the two leaders did not close a deal, they agreed to a cease fire in the trade war that has been a drag on the global economy. After an 80-minute session, the two sides announced that trade talks would resume and that the Chinese would buy more American farm products — they bought 544 million metric tons of soybeans before the meeting began. Trump said the U.S. would indefinitely postpone a plan to raise tariffs on an additional $300 billion worth of Chinese goods. The U.S. will also temporarily lift some of the restrictions that prevented Huawei from purchasing American technology. At the post-meeting press conference, President Trump described the discussions as “intricate,” and added, “We’re going to work with China on where we left off to see if we can make a deal.” On Sunday, he recapped the meeting in a series of tweets, saying, “The quality of the transaction is far more important to me than speed. I am in no hurry, but things look very good!”

The Fed and the feud

Much of the stock market’s rebound over the past few months has been due to the fact that the Fed moved away from its plan to raise its benchmark rate this year. In fact, given the low rate of inflation and the global slowdown, many investors expect the Fed to cut that rate when it meets later this month. Last week, Chairman Jerome Powell said the Fed was weighing a rate cut because economic “cross currents” had led to “greater uncertainty.” But Powell added that he was “mindful that monetary policy should not overreact to any individual data point or short-term swing in sentiment.” James Bullard, the President of the Federal Reserve Bank of St. Louis, the only committee member who voted to lower the benchmark rate at the June meeting, said that a cut of half a point would be “overdone” and that a quarter-point reduction would be enough to offset the slowdown. This came in a week during which President Trump again targeted the Fed, likening it to “a stubborn child.” Trump said Powell, “[is] not doing a good job,” and, “Nobody ever heard of him, and now I made him.” Powell, for his part, said the Fed would not give in to political pressure: “We are a strictly nonpolitical agency. We’re human, we’ll make mistakes,” he said, but added, “We won’t make mistakes of integrity or character.”

Stress tests completed

The Fed has completed the second round of its annual stress tests which assess the nation’s 18 biggest banks. The Fed found them all able to withstand a financial crisis. The finding frees the banks to increase dividends and repurchase shares. The tests were created as part of the Dodd-Frank Act put in place after the 2008 financial crisis.

OPEC and Russia set to extend production cuts

Oil prices have been fluctuating lately over concerns about global growth, disruptions to supply because of attacks on tankers in the Gulf of Hormuz and sanctions on Iran. The Organization of Petroleum Exporting Countries (OPEC) will meet today, and OPEC and non-member Russia have apparently agreed to extend for at least another six months the production cuts of 1.2 million barrels a day initiated in January.

AbbVie and Allergan

The pharmaceutical giant AbbVie said it would buy Allergan, which makes Botox, among other products, for $63 billion. The purchase would be the second biggest deal in the industry this year after the $74 billion acquisition of Celgene by Bristol-Myers Squibb.

In other news, the government’s latest estimate for first-quarter GDP was unchanged at 3.1 percent. Orders for durable goods were down 1.3 percent in May from April, mainly because of a 28.2 percent falloff in orders for commercial aircraft. Orders for nondefense capital goods excluding aircraft were up a better-than-expected 0.4 percent. Consumer spending increased 0.4 percent in May from April while incomes rose 0.5 percent. The personal consumption expenditures (PCE) price index was up 0.2 percent for the month and 1.5 percent for the year; the core PCE index, less food and energy, rose 0.2 percent for the month and 1.6 percent year over year. The S&P CoreLogic Case-Shiller home price index advanced 3.5 percent in April from a year earlier. New home sales tumbled 7.8 percent in May from April, while pending home sales rose 1.1 percent. There were a range of readings on consumer sentiment last week. The Conference Board said its index of consumer confidence fell from 131.3 in May to 121.5 in June, its lowest level since September of 2017, because of concerns about trade and a slowing jobs market. The University of Michigan’s index finished at 98.2 for the month of June after hitting 100 in May. But Bloomberg’s weekly consumer sentiment index came in at 63.6, the highest reading in eighteen years. Lastly, first-time jobless claims for the week ending Jun. 22 jumped 10,000 to 227,000; the four-week moving average was up 2,250 to 221,250.

A look ahead

This week’s releases will include the latest on the Institute for Supply Management’s manufacturing and nonmanufacturing indexes, construction spending, vehicle sales, the trade balance, consumer comfort, factory orders, orders for capital goods, and, on Friday, the jobless rate for June, expected to remain unchanged at 3.6 percent.

Have a happy and healthy Fourth of July.

Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.