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Posted on July 2, 2019

Weekly Market Commentary – July 1, 2019

Market Commentary

The S&P 500 slipped slightly last week after reaching a new high the previous week. The S&P 500 declined 0.3%. The MSCI ACWI inched 0.1% higher, and the Bloomberg BarCap Aggregate Bond Index rose another 0.4%. Yields continue to fall as expectations of an interest-rate cut mount.

Economic data supported the thesis that the U.S. economy is slowing but not headed for an imminent recession. Income and wage data both showed solid gains and reinforced our view that the U.S. consumer remains a healthy stabilizer for the global economy. Presidents Trump and Xi agreed to restart trade talks as the U.S. administration postponed any new tariffs on China.

Key Points for the Week

  • Presidents Donald Trump and Xi Jinping met at a global summit in Japan and agreed to reinitiate trade talks between the U.S. and China.
  • Economic data showed the U.S. economy remains decent, but trade and other uncertain issues continue to pressure growth.
  • The S&P 500 wrapped up one of the best six months in many years.

June was a fantastic month for most investors. The S&P 500 rose 7%, and the MSCI ACWI rose 6.5%. Ongoing optimism about interest-rate cuts and a hopeful outlook on trade supported markets.

interest rates
Morningstar 06/30/19

The numbers above or below each year rank the performance of that year compared to the others analyzed. The “3” above the S&P 500’s 2019 means its performance was the third highest for stocks.

Markets Produce Strong Results in the First Half of 2019

The first half of 2019 was rewarding for many investors. The S&P 500 soared 18.5% as markets bounced back sharply from the declines experienced in the fourth quarter of 2018. A quick look at the first six months compared to the first half of other years shows how strong the period has been.

The accompanying chart shows returns and ranks the first-half performance of the Bloomberg BarCap Aggregate Bond Index and the S&P 500 for the last 25 years. Bonds posted their best returns since 1995. Stocks did almost as well, bested only by performance in 1995 and 1997.

There are some interesting similarities between 1995 and 2019. First, both bonds and stocks performed very well. The biggest reason is both years saw the Federal Reserve cut rates after a previous period of rate hikes, assuming the Fed cuts in July. Neither period was in a recession; thus, the Fed reductions were “insurance cuts” against the risk of recession rather than reactions to an existing recession. Markets reacted positively.

The rally in 1995 spurred a strong upswing in U.S. stocks. The upswing continued for a number of years and gradually gave way to the technology bubble, which popped in the early 2000s.

A similar rally in today’s market would likely require a few key ingredients. First, the restarted trade negotiations between the U.S. and China would need to produce a treaty with a stable outcome, and global trade would need to rebound quickly. It would also require economic growth to rebound and wage growth to remain moderate. The combination would cause earnings to rebound and markets to continue to rally.

While the G20 meeting agreement to restart talks gives this scenario a chance, it seems overly optimistic. Investors should remember the great rally this quarter is in part a reaction to the weak performance of 2018. Gains remain likely, but they will require more perseverance.

Fun Story

Boeing has taken over the employee parking lot

More than 500 Boeing 737 MAX airplanes have been grounded around the world, and 100 of those are grounded at the Boeing headquarters. One hundred 737 MAX planes take up a large amount of space. So much so that Boeing had to start parking them in the employee parking lot. Parking in two parking spaces is bad; taking up 20 spaces is just ridiculous.

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