Monthly Market Insights | July 2019
The stock market rode a wave of optimism this month, thanks to continued belief in a potential interest rate cut by the Federal Reserve and the lessening U.S.-China trade tensions.
The Dow Jones Industrial Average picked up 7.19 percent, while the Standard & Poor’s 500 Index rose 6.89 percent. The NASDAQ Composite led, gaining 7.42 percent.¹
Stocks opened the month lower, but soon rallied on the belief the Fed would adjust interest rates. A sluggish jobs report added fuel to the fire, further increasing investors’ confidence in a future rate cut.
Stocks gained on news that Mexico and the U.S. had averted further tariffs on Mexican imports. The rebound lost momentum, however, as tensions rose in the Middle East after shipping disruptions in the Gulf of Oman.
All Eyes on the Fed
At its June meeting, Federal Reserve officials issued a more "dovish" statement that indicated it would consider policy actions to sustain economic growth.
Investors interpreted the Fed statement to mean that rates could be adjusted as early as July. The enthusiasm helped ignite the next leg of June's rally, with the S&P 500 touching a new record high and the Dow Industrials and the NASDAQ Composite finishing a hairsbreadth from their historical peaks.
Stocks climbed again on the heels of a positive trade discussion between President Trump and China's President Xi – only to fall in response to comments by Fed Chair Powell, indicating continued uncertainty regarding the timing of any rate adjustment.
All industry sectors, save Real Estate (-0.27 percent) and Utilities (-0.72 percent), moved higher in June, led by strong gains in Materials (+7.85 percent) and Technology (+6.48 percent). Prices also advanced in Communication Services (+1.60 percent), Consumer Discretionary (+4.79 percent), Consumer Staples (+1.03 percent), Energy (+2.21 percent), Financials (+1.30 percent), Health Care (+3.09 percent), and Industrials (+3.84 percent).²
What Investors May Be Talking About in August
The Federal Reserve ultimately kept interest rates unchanged, but tempered this news by stating that they would continue to monitor economic news and react in an appropriate manner to maintain the current economic expansion.
Investors may start looking to critical economic data and continued trade negotiations to anticipate future Fed actions.
Secrets of the Temple
Some investors believe that the Fed may support stock prices with its monetary policy. The comments made by Fed Chair Powell in January helped fuel a first-quarter rally. And in June, trade comments made by Powell also helped support the June gain.³
It’s impossible to predict what actions the Fed will take on interest rates or how the markets will react. But if the Fed sees stronger economic numbers and adopts a more-neutral stance on interest rates, that may prompt investors to temper their expectations.
Overseas markets rebounded in June, with the MSCI-EAFE Index climbing 5.31 percent.⁴
European markets benefited from comments by Mario Draghi, President of the European Central Bank. Draghi stated that he is prepared to loosen monetary reins to stimulate lethargic E.U. economies.
France tacked on 5.6 percent, while Germany rose 5.7 percent. The U.K. lagged a bit, but still picked up 3.3 percent.⁵
Pacific Rim stocks posted strong returns, with Australia climbing 3.5 percent; Hong Kong, 4.4%; Japan, 3.3 percent.⁶
Gross Domestic Product
First-quarter economic growth remain unchanged at 3.1 percent (though, consumer spending was revised to a slower rate), while business spending, exports, and government contributions were revised higher.⁷
Job growth slowed in May, with nonfarm payrolls increasing by 75,000. The unemployment rate was steady at 3.6 percent, while wage growth slowed to a 3.1 percent rise.⁸
Consumer buying strengthened in May, rising 0.5 percent, while April’s reported 0.2-percent decline was revised to an increase of 0.3 percent.⁹
Output at the nation’s factories, mines, and utilities rose 0.4 percent in May.¹⁰
Housing starts sagged 0.9 percent, as high prices and low inventory appear to have outweighed a decline in mortgage rates and the healthy labor market.¹¹ Sales of existing homes rose 2.5 percent in May, exceeding market expectations.¹² Sales of new homes disappointed for the second consecutive month, dropping 7.8 percent, despite the tailwinds of falling mortgage rates and increased supply.¹³
Consumer Price Index
Consumer prices rose by 0.1 percent in May, suppressed by a steep decline in energy costs. For the 12-month period, inflation registered an increase of 1.8 percent.¹⁴
Durable Goods Orders
For the third time in four months, durable goods orders declined, sliding 1.3 percent. A sharp drop in civilian aircraft orders and lower defense-related purchases were the leading reasons for the weak number. Excluding these sectors, orders of durable goods were up 0.6 percent.¹⁵
The Fed elected to hold interest rates steady at its two-day June meeting, hinting at the possibility of a rate cut some time this year.¹⁶
Though the Fed believes that the economy is poised to continue expanding at a moderate rate, it did acknowledge the increasing risks to sustaining growth, with trade and global economic uncertainties of particular concern.¹⁷