Posted July 31, 2019

Lower Rates But No China Deal

July has historically been a good month for stocks and this year was no exception. We thought the gains for the month might be diminished this year by the best first half for the market in 22 years, but the rally continued into July.  The two primary themes remained the same, a more accommodative interest rate policy from the Fed and the hopes for some type of China trade deal.  This month we added corporate earnings to the mix, with most expecting earnings to be flat, but about half way through the reports nearly 80% of companies have earnings that are better than expected.  At month end the S&P 500, despite a more than 1% decline on the final day of trading, had gained 1.3% and is now up 18.9% for the year.  Oil, gold and interest rates all ended the month little changed.

We began the month with a holiday shortened week that saw the markets move higher. A delay in the China tariffs, while talks continue, helped get the week off to a good start.  A light volume rally on the ½ day of trading before the 4th sent the S&P 500 to a new all-time high.  The Friday after the holiday we learned a better than expected 224,000 new jobs were created in June and the week ended with the S&P gaining 1.7%.  The first full week of trading began with the market moving lower on some concerns that the strong jobs report might make the Fed hesitant to lower rates on the 31st, but on Wednesday Fed Chief Powell testified before Congress and sent strong signals a rate cut was coming.  By week’s end all 3 major indices had hit new all-time highs and the S&P 500 gained another .8%.  The 3rd week of July started with news that China, who seems to be paying a higher price than the U.S. for the trade war, saw the slowest quarterly growth in nearly 30 years.  We started to see many of the companies in the S&P 500 report earnings and they were, for the most part, better than expected.  However, at week’s end concerns about China trade won out over earnings and talk of lower rates to send the S&P 500 down 1.3%.  The last full week of the month 30% of the companies in the S&P 500 reported earnings, with 78% being better than expected.  Tuesday, we learned face to face talks with China will resume the following week and Q2 GDP, while not as strong as Q1, was still at an annual rate of 2.1%, better than what was expected.  At the end of the week the S&P 500 had gained 1.7%. The final few days of the month were focused on earnings, and the Fed did drop interest rates by 25 basis point, not the 50 that some had hoped for, but a step in that direction.

August & March have traditionally been months that performed at the market average, 6 months have been better and 4 have been worse. Early August tends to be stronger than late August as we near the undisputed leader in worse months, September.  Earnings will continue to play a roll early in the month, but China trade is likely to be the focus as the month wears on.  The global economy is clearly slowing and the strong rally this year has made many stocks richly valued.  The hope is lower interest rates, and an agreement with China ending the trade war, will reignite the global economy and accelerate corporate earnings.  We would once again expect positive news on China trade to help the market and negative news to be problematic.  Keep in mind, with the S&P 500 up nearly 19% in just 7 months, a 5-10% pullback could come at any time.  However, we continue to believe buying any tradeable dip is the correct approach in this environment.

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