Increasing expectations of a Fed rate cut later in July helped major US stock indices reach new all-time highs. In his testimony to Congress, Federal Reserve Chairman Jerome Powell hinted at cutting rates in the upcoming meeting. Powell cited ongoing trade tensions and the lack of strength in the global economy as areas that continue to weigh on the US economic outlook. Following the comments, the implied probability for a rate cut in July rose to 100% according to the CME Group’s FedWatch tool.
With a clearer picture of rate cut expectations, investors will be turning attention to Q2 earnings reports until the July 31 Fed meeting. Earnings season officially kicks off this week as major banks begin to report results. Analysts expect total earnings for the S&P 500 to decline 3% on a year-over-year basis. If earnings do decline for the quarter, it would mark the first time since Q1 and Q2 2016 the Index has reported two consecutive quarters of falling earnings growth. The healthcare sector is expected to report the strongest positive growth while the materials sector is expected to report the sharpest drop in earnings.
2019 has been a great year for stocks so far, but with the upcoming earnings uncertainty and markets at record highs it is not unreasonable to a slight increase in volatility as things play out. This is why it is important to remain committed to a plan and maintain a well-diversified portfolio. Flashy news headlines can make it tempting to make knee-jerk decisions, but sticking to a strategy and maintaining a portfolio consistent with your goals and risk tolerance is imperative for long-term success. Including a broad mixture of asset classes can help with achieving more consistent long-term results, smoothing the short-term market noise and making it easier to weather market fluctuations.
China’s Q2 GDP growth came in at 6.2% – the lowest level in over 27 years. The reading was 20 basis points lower than last quarters reading and falls in line with the declining trend that began to form in 2010. Behind the numbers, the data looks slightly more attractive as factory output and retail sales growth beat analyst expectations. These numbers helped drive returns to the Shanghai Composite index. However, the bigger picture remains poor as trade tensions with the US, weakening global demand, and persistent off-balance sheet borrowing by local Chinese governments has weakened Chinese economic growth.
*Chart source: Bloomberg
Broad equity markets finished the week mixed as large-cap US stocks fared better than small-cap stocks. S&P 500 sectors were also mixed, with cyclical sectors outperforming defensive sectors.
So far in 2019, technology and consumer discretionary stocks are the strongest performers while healthcare has been the worst performing sector.
Commodities were positive for the week as oil prices increased by 4.69% to $60.21/bl. The rise in prices came as a report stated OPEC will extend its production cuts due to lackluster demand. Prices rose as the Tropical Storm Barry hit the Gulf of Mexico further tightening supply. Additionally, US crude inventories experienced their steepest drop in three weeks. Coupled with rising tensions between Iran and the US, oil prices have been able to climb. Last weeks gain pushed oil over the $60/bl level for the first time since May.
Gold prices rose by 1.15%, closing the week at $1,417.65/oz as some volatility returned to the markets. Additionally, Fed President Jerome Powell reaffirmed the Fed’s willingness to cut rates. Since the metal is a US dollar-denominated safe-haven asset, it tends to perform best when interest rates are low and volatility is high. Currently, gold prices sit near a 6-year high as the current economic environment has helped foster additional price increases.
The 10-year Treasury yield rose from 2.04% to 2.12%, resulting in negative performance for traditional US bond asset classes. Yields increased the most in 3 months as core inflation came in higher than expected. Over the last month, the 10-year Treasury yield hit the lowest level in 2 years as rising expectations of rate cut drove yields down. However, yields were recently driven up by a combination of low investor demand and rising inflation. Currently, the probability of rate cut sits at 100% for July.
High-yield bonds were slightly negative for the week as riskier asset classes closed mixed and credit spreads loosened. However, as long as US economic fundamentals remain healthy, higher-yielding bonds have the potential to experience further gains in the long-run as the risk of default is still moderately low.
Asset class indices are positive so far in 2019, with large-cap US stocks leading the way and aggregate bonds lagging behind.
We do the worst possible thing at the worst possible time because we are most certain that we are right just when we are most likely to be wrong.”
– Jason Zweig
Investors often cost themselves money because of irrational short-term behavior. When exuberance or fear set in people tend to act on emotions, leading them to make decisions at the worst time. The best way to avoid this irrational behavior is to implement a plan with predefined steps to take ahead of time. If you stick with a plan and maintain a properly diversified portfolio, you increase your chances for a successful investment outcome in the long-run.
Our investment team has two simple indicators we share that help you see how the economy is doing (we call this the Recession Probability Index, or RPI), as well as if the US Stock Market is strong (bull) or weak (bear).
In a nutshell, we want the RPI to be low on the scale of 1 to 100. For the US Equity Bull/Bear indicator, we want it to read least 66.67% bullish. When those two things occur, our research shows market performance is strongest and least volatile.
The Recession Probability Index (RPI) has a current reading of 29.19, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 100% bullish – 0% bearish, meaning the indicator shows there is a slightly higher than average likelihood of stock market increases in the near term (within the next 18 months).
Investors will be shifting attention to Q2 earnings season as major US banks begin to report earnings results.