With just one week remaining in the month of June, the 2Q was a decidedly bumpier and more uncertain experience than enjoyed in the first 3 months of 2019. Make no mistake however, the most recent 18 months have been anything but smooth sailing (but aside from 2017, the market rarely is) as trade disputes and the path of monetary policy are recurring sources of tremor. Still, as we look to the quarter’s final trading days this week, the S&P500 is very near to recapturing all-time highs. This follows a strong week fueled by formal communication by the Fed that its monetary policy is shifting and a cut to rates will occur when it meets in July. Also assisting the equity market is welcome news that Trump and China’s Xi will talk concerning the current trade differences at a G-20 meeting in Japan this week. The news flow is again positive from the perspective of equity markets. Yet as friendly as those developments are, this should also serve as reminder that risks remain. Research firm Strategas recently put it this way: investors and markets are presently at the whim of three people – Fed Chairman Powell (unelected), President Trump (unpredictable), and President Xi (largely unaccountable). This should caution investors from getting too complacent.
From an economic perspective, one doesn’t need to look hard to observe data that is dramatically softer than it was throughout most of 2018 and even into 1Q. Manufacturing surveys, most recently Dallas’ reveals deteriorating new orders, fewer employee hours being worked, and overall sobering sentiment. A national business activity indicator (World Economics SMI) hit a 28-month low, driven by softening sales growth, prices charged, and headlines. These are just a few of the signals coming in from around the globe – not just in the US. A number of readings are also gaining focus from Germany, Europe’s biggest economic contributor. Bright spots remain however; consumers continue to appear optimistic vis a vis medium and heavy truck sales which are running at their strongest pace since at least 2006. Home sales and refinancing activity can also be viewed only as a positive.
Despite lingering trade tension, soft economic data, and questions over future Federal Reserve policy, the S&P500 is up roughly +7% this month. If sustained that would be the best June in over sixty years accordingly to Dow Jones Market Data (since 1955); the Dow’s performance is even more impressive with the best June since 1938. As inspiring as that may sound, recent performance is strongest in the traditionally more defensive corners such as utilities, consumer staples, etc. of the market. Similarly, small-size companies – long viewed as more economically sensitive – remain roughly -10% from their highs while the larger-cap dominated indexes are fully recovered. That suggests participants are skeptical of the underlying economic conditions and that the continued melt-up is more a function of a theme referred to as “TINA” perhaps. “TINA”, or There Is No Alternative, was a theory cited often a few years ago as stocks are the only option for return-seeking investors in a world where negative-yielding bonds are such a significant portion of the fixed-income markets (the only other widely recognized asset class for traditionally oriented investors aside from cash). With global central bankers uniting in a shift toward easier monetary policy via lower target interest rates, the negative-yield environment only looks set to expand and persist longer in the short-run making further attractive assets that generate the bulk of their returns from price appreciation. We believe this environment can continue to aid riskier assets longer and further extend the economic cycle, but also gives monetary policy less effective tools to combat slowing down the road. That makes resolution to trade uncertainty only more important as we move through time.
As we conclude 2Q, we remain fascinated by just how true the old saying goes about markets climbing a wall of worry, for there certainly remains no shortage of worries. As Yogi Berra might have put it, we are certainly closer to the end of the cycle than we were some time ago.