The market has rallied in the first half of the year, albeit with a degree of volatility. The market’s volatility has been driven by projections and unmet expectations. However, investors are still finding confidence in a growing economy, low unemployment, little inflation and an accommodating Federal Reserve. During this quarter, we have carefully monitored escalations in the trade war with China, economic indicators, consumer spending, geopolitical risks with Iran and interest rates.
The trade war has been dominating the headlines in recent times, with tariffs declared on $250B of Chinese goods in May and further tariffs looming as a trade weapon. The most recent round of negotiations occurred at the G-20 summit in Osaka, Japan last week. President Trump and President Xi Jinping met on Saturday. The result of their meeting was a postponement on additional tariffs and a commitment from both sides for further negotiations. Stock futures were up over the weekend with the markets reacting positively to the G-20 meeting. On Monday, the S&P500 opened to a record high.
At the same time on Monday morning, news surfaced about Iran crossing over their nuclear stockpile limit set in the 2015 nuclear deal. Tensions in the gulf have risen with Iran allegedly downing a US drone and allegedly arranging several oil tanker attacks. Iran has refused to negotiate with the current administration, stating its discontent for the sanctions placed on its oil markets. Oil prices are being depressed by higher production from the US, while simultaneously being inflated by OPEC’s supply cut and a risk premium for Iran. Oil is trading at around $59 per barrel.
Federal Reserve Chair Jerome Powell announced an openness to rate cuts if necessary, citing “trade negotiations and other matters.” The Fed’s latest forecast however, was no rate cuts expected until 2020. Lower yields in the bond markets have driven bond investors to look for yield alternatives. Some yield alternatives are high dividend paying stocks, Real Estate Investment Trusts, and Exchange Traded Funds concentrating on dividend yield. In addition, Gold prices have rallied this quarter, trading at just under $1400 per ounce in response to the Federal Reserve Monetary policy as investors anticipate inflation in the coming years.
The US economy has continued to produce healthy economic data. The unemployment rate is sitting at 3.6% and during April and May we saw a continued trend of positive wage inflation and consumer spending. In the latest US Employment Report, the US economy added 75,000 jobs in May.
The current US economic environment constructed of low unemployment, suppressed interest rates, and wage growth will optimize the U.S. consumer’s purchasing power and confidence.
Looking ahead, we remain optimistic on the U.S. equity markets based on healthy economic data, the China Trade agreement, an accommodating Federal Reserve and the increased US consumer purchasing power. We are expecting the June Employment Report due later this week as our next guide for economic health. We will be closely monitoring earnings season which starts in mid-July.
The market has rallied from the December low last year. While there are still several risks on the horizon, we believe the upside of this bull market outweighs the downside risk.
Again, thank you for your continued support and please do not hesitate to contact us if you have any questions. Happy 4th!
Sources of Information:
Bureau of Labor Statistics
Bureau of Economic Analysis
Federal Reserve Economic Data