Market Monitor: June Update
Twice a month, we send clients this overview of the markets and roundup of key economic news stories. Similar to Altair Insight, it enables us to share our big-picture views while also highlighting select market returns and developments that we feel are important.
Headlines and Highlights
- Fed hints broadly at July rate cut: The Federal Reserve signaled it is ready to reduce interest rates as needed to help strengthen sagging inflation and a slowing U.S. economy. After raising rates four times in 2018 and committing to a more measured approach earlier this year, Fed officials dropped the word “patient” from their statement in June. Chairman Jerome Powell said “many participants” on the Fed’s policy-making Federal Open Market Committee advocate a rate cut, which market traders now project as a near-certainty at the Fed’s July 30-31 meeting.
- Trade truce buys more time: The threat of additional U.S.-China tariffs was put on hold when Presidents Donald Trump and Xi Jinping left their Japan meeting without a trade deal but agreed to resume negotiations. Trump eased restrictions on Chinese telecom giant Huawei’s purchases from U.S. suppliers and said he will not put a threatened new round of $300 billion in tariffs on Chinese imports into effect for now. A similar trade truce between Trump and Xi at the last G-20 summit six months ago lasted three months.
- Stocks enjoy best June in decades: The broad U.S. stock market as gauged by the Standard & Poor’s 500 Index capped a strong first half with a 6.9% return last month, its largest June gain since 1955 and best first six months (18.5%) since 1938. Technology stocks added 9.1% in June and were the top-performing sector in the first half with a 27% return, while REITs were the top-performing asset class through June at 19.3%
Selected Market Returns
Sources: Morningstar, Altair Advisers
- Federal Reserve officials invigorated markets by making clear in June that they are prepared to loosen monetary policy to maintain this economic cycle. We believe the expectation of multiple rate reductions in the second half of 2019, which the Fed has done nothing to rebut, should support stocks for the rest of the year while economic growth slows.
- While the failure of the United States and China to end their more than year-old trade war persists, we think economic and political incentives remain so high for both sides that a deal will be made prior to next year’s election. An agreement is likely to provide an additional lift to markets, although more volatility is probable before that occurs.
- The U.S. economy remains sound despite an inevitable slowing from last year’s strong growth propelled by corporate tax cuts. Manufacturing growth has softened and business spending expectations have come down, but the labor market is strong and other key indicators remain positive.
- Small-cap stocks, while enjoying a collective 16.8% return in the first half, have lagged the broader U.S. market significantly over the past 12 months: a 3.5% decline for the iShares Russell 2000 ETF compared with a 10.8% gain for the iShares S&P 500 ETF. We expect them to close the performance gap going forward based in part on their valuations being lower than those of large caps.
- International trade tensions have pressured non-U.S. developed stocks and kept them trailing their U.S. counterparts despite a strong first half (14.2%). The expectation of additional easing by the European Central Bank and more government stimulus by China should help bolster both international developed and emerging-market stocks.
The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice