After beginning July with a strong posture, markets seem to be pausing to catch a breath. Domestic equities slipped -1.2% during the week ending July 19, effectively halving the month-to-date performance. It is challenging to point to any single factor or headline, but perhaps most notable is the reality that corporate earnings being reported for the 2Q period are soft. When combined with the reality that the market as a whole is up handsomely YTD despite what seems to be persistent negative headlines (be it trade, geopolitical tension, yield curve inversion, etc), it’s not hard to understand why the investment community’s prevailing sentiment is that the good times will not last.
With the exception of May, 2019 is probably surprising most everyone in the investing community in quite positive fashion. Despite the realities that both economic and corporate earnings data appear to be in a trend of slowing, AND continued tariff/trade and political uncertainty both the S&P500 and Dow busted through respective round-number levels of 3,000 and 27,000 last week. So far in July, the S&P500 is up another +2.1% bringing the YTD climb to more than 20%. About 86% of the S&P500 constituents trading above their 50-day moving average. In the short-run, this probably means the market is overbought and due for a pause – that idea is also significant when one considers we are entering what is traditionally a weaker seasonal period. But more important is the message it tells about momentum present under the surface. Interestingly, all of this has happened at the same time the yield curve has remained troublingly flat (or inverted depending on the maturities inspected).
As we enter the 2nd half of 2019 it is difficult to recall a time when the market was hitting new highs but investor attitudes felt so indifferent. Rather, sentiment is guarded. This is likely due to a Federal Reserve that raised interest rates 4 times in 2018 and now appears to be “too tight” when also considering persistent uncertainty from international trade and tariff talk. Taken together, investors perceive the global economic outlook is at risk.
As this quarter’s Nvest Nsights newsletter highlights, the good news is those worries seem to be keeping the close attention of those with the power to resolve. “Can’t Live There” and “Missing – Reward” are efficient reads on the key items driving financial markets and context about the current (and now longest) economic expansion in US history. Strong starts to a year bode well for the balance, but we also submit that the path of both the market and policy (trade & monetary) adjustments may not be smooth. We also share several “Frequently Asked Questions” being received recently from clients; we hope you find those relevant and helpful.
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