Market Review July 2019

Market Review & Outlook

July 2019

Stocks ended their best June in decades on a positive note, as all the major averages in the US enjoyed modest gains, apparently anticipating that Presidents Trump and Xi would make progress in trade negotiations when they met at the G20 summit in Japan this past weekend. Specifically, the S&P 500’s 6.9% performance this past month was the best June since 1955, and the index’s 6-month performance of more than 17% was the best first half for the market since 1997. Please refer to the table to see how various asset classes performed in recent periods.

Despite the market’s stellar performance so far this year, things have not been completely rosy from a fundamental standpoint. Investors seemed to be coming to this conclusion in May, as numerous economic reports showed that growth here in the US and around the world is continuing to slow. In May, the S&P 500 declined 6.6% and it looked like another good year for "sell in May and go away." Alas, as soon as that sell-off began to gather momentum, we had Fed officials rushing out once again to reassure market participants that the Fed has their back. Specifically, James Bullard, president of the St. Louis Fed, said the following on June 3: "A downward policy rate adjustment may be warranted soon to help re-center inflation and inflation expectations at target and also to provide some insurance in case of a sharper-than-expected slowdown."

The next day, the market began to go up again, and the S&P 500 hit another new, fractional all-time high on June 21. President Trump and other members of his administration have continued to hint that a trade resolution with China is not too far off, so some credit should go to them as well. At the G-20 summit this past weekend, Trump and Xi met briefly and agreed to resume trade talks that broke down in May. While the market cheered this result and vaulted the S&P 500 to another new, all-time high, trade talks could drag on for months and result in more tariffs before there is a deal.

Today, the post-2009 streak of economic growth rolls into a record 121st month, barring a hindsight-aided recession call from the National Bureau of Economic Research (NBER). Yet surveys from the Conference Board and the Business Roundtable show business confidence is dipping, and American CEO’s intend to dial back hiring and spending as they expect sales to trend lower. Moreover, just last week, the Federal Reserve shifted its stance from being "patient" to being willing to "act as appropriate to sustain the expansion."

Writing in Bloomberg yesterday, economist Gary Shilling contends that the NBER may indeed determine that the expansion will soon, or has already, ended. Shilling cites the pair of large downward revisions to the March and April readings of non-farm payroll figures compiled by the Bureau of Labor Statistics. That was followed by a feeble net gain of 75,000 jobs in May (the consensus estimate was for 175,000 new jobs). Shilling notes, "an analysis of post-World War II data reveals that employment often slides from diminishing gains to substantial declines within a few months of the onset of recessions." The June payroll figures are set for release this Friday.

Key manufacturing data points have also turned south, with the Institute for Supply Management’s new orders index for June falling to its lowest since December 2015.