Posted June 29, 2018

Trade War Fears Weigh

Over the last 90 years June has been a very average month for the market, falling right in the middle of monthly performance averages. This June had two different halves, the first half during which we saw the S&P 500 move steadily higher to a 3 month high, and the second half during which the S&P 500 gave up much of the gains from the first half.  Trump’s tough talk on trade was responsible for the selling, as concerns grew that we are headed for a trade war with the rest of the world.  I think most of us know the U. S. has been playing on an unlevel field when it comes to trade, but not everyone has the appetite to fix the problem.  The biggest surprise during the month may have been the sharp 11% increase in the price of oil to the highest level in 4 years, helping the oil stock index to its best quarter in 7 years.  Oil prices have now risen by 25% since the first of the year.  At the end of the month the S&P 500 was up .5% and is now 1.7% higher for year.

The month began with a quiet news backdrop and each time the news goes quiet, the market tends to rally. The month began on a Friday with news that a better than expected 223,000 new jobs were created in May, and the unemployment rate dropped to an 18 year low!  Throughout the first full week of the month the market moved steadily higher and the tech heavy NASDAQ, and small cap Russell hit multiple new all-time highs.  At the end of the first full week of trading the S&P 500 had gained 1.6%, which turned out to be the best weekly performance in June.  The second week began with the market edging higher to what would ultimately be the high for the month.  The Fed did raise interest rates by 25 basis points, as expected, but they said to expect 2 more rate increases this year, while many market participants were expecting just one.  A report that retail sales in May were double expectations was widely ignored, as trade war concerns took center stage.  The S&P 500 ended the week unchanged.  From the middle of month until the end it seems like there was a daily focus on tough trade talks, with threats being made on all sides.  The market does not like uncertainty and, while most understand Trump’s “tough talk” negotiating style, the talk did swing the markets.  The Dow was down the first 4 days of the week, which made it 8 consecutive days lower for the first time in over a year.  Fortunately, a modest Dow rally on Friday helped the index avoid its first 9 consecutive day losing streak in 40 years!  The S&P 500 ended the week with a .9% loss.  This week has continued to be about trade wars with the market reacting to each comment.  Tuesday we had the last original member of the Dow Industrial average, GE, removed due to poor performance and replaced by Walgreens.  Ironically, in the 3 days following the change, GE rallied strongly while Walgreens, on news Amazon had entered the prescription drug space, plunged.  The Dow traded lower 10 of the last 14 trading days of the month, but did end with a 2 day rally that will hopefully carry over into July.

July is historically the best single month of the year for the market averages. The month has closed higher nearly 60% of the time and the average gain has been double a normal month.  The economy is stronger than it has been in a number of years and that should propel corporate earnings, which should be good for stock prices.  We would expect, in the current environment, to see stock prices near their highs, but concerns about trade have been weighing on the averages.

It appears the market is going to continue to closely follow news on trade. IF we start to hear news about China or the EU scheduling trade talks with the U.S. we would expect the market to react favorably but, the longer this stalemate drags on, the more it will weigh on the market and ultimately the economy.   We believe the tough talk on both sides is simply posturing and a resolution will evolve. Barring some headline making event the path of least resistance appears to be higher.

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