Concerns about China trade sent the market 6.6% lower in May, its worst May performance in 9 years, but conciliatory comments from China sent the Dow more than 500 points higher in early June and we were on our way to a new all-time high for the widely followed S&P 500. An increasing probability the Federal Reserve will lower interest rates, perhaps as soon as July, added to the buying enthusiasm. June is normally a relatively quiet month, but by month end the S&P 500 had made up all of May’s decline and then some as stocks put in their best June performance in more than 80 years! In addition, it was the best first half of a year for stocks in 22 years. At month end the S&P 500 had gained 6.9% and is now 17.4% higher for the year. Gold was a big gainer for the month, adding 8% and hitting the highest level in nearly 6 years. A resurgence in Bitcoin sent that price 37% higher.
The first week of the month was one of the best weeks this year. Conciliatory trade comments from China, a delay in the trade tariffs on Mexico and talk of lower interest rates from the Fed combined to ignite a 4.4% rally that erased two thirds of the May losses. At the end of the week there was a disappointing government jobs report, but that further fueled the rally as it made lower rates more likely. The second week began with news the U.S. and Mexico had reached an agreement to avoid trade tariffs. Some solid corporate earnings reports during the week helped, but the highlight of the week may have been the lowest volume for a 5-day week this year, as vacation season shifted into high gear. At the end of the week the S&P 500 had gained another .5%. The third week of June saw the S&P 500 hit a new all-time high on news Presidents Trump & Xi would meet at the G20 Summit at the end of the month. The Fed left interest rates unchanged, but left the door open for a cut in rates, perhaps as soon as July. Mid-week the European Central Bank suggested they may need to provide additional stimulus to the lagging European economy. At the end of the week the S&P 500 had added another 2.2%.During the last week of the month we learned Consumer Confidence has dropped to a 2 year low as trade tariff talk and political infighting are taking a toll. However, market participants continue to focus on China trade and lower interest rates to the exclusion of most other news. The week ended with the S&P 500 down .3%.
Over the last 90 years July has been the best month of the year for stocks. The month has shown an average gain of 1.5% and closed higher nearly 60% of the time. After the dramatic gains in June one would expect a period of “digesting” those gains, but China trade and the Fed are likely to be the headlines for July. Most believe a trade agreement between the U.S. and China will help reignite slowing global growth, so the lack of an agreement could be problematic. The Federal Reserve Open Market committee has their next meeting on interest rates the last day of July and the vast majority of analysts expect a 25-basis point cut in rates, with some suggesting a 50-basis point cut is needed. Lower rates are something money managers want to see, and we expect that meeting to be a potential market mover. The market does appear to want to move higher, but valuations are once again getting rich and we need a China trade agreement and a cut in rates to help the rally continue. After the strong gains we have seen this year we would not be surprised to see a 5%-10% pullback that could come at any time, but we would be a buyer on that weakness.
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