Hurry Up and Wait | The WMA Weekly Market Wrap

July 2, 2019

The major domestic equity indexes closed mixed last week. The large-cap benchmarks fell back from the record highs they had established the previous week, while the S&P MidCap 400 and the small-cap Russell 2000 recorded small gains, but remained below their late-2018 peaks.

As traders begin to look ahead to second-quarter earnings reports, sentiment seemed focused on geopolitical concerns. Further tensions with Iran sent oil prices to their highest level in a month, benefiting energy shares. On Tuesday, stocks appeared to fall in response to warnings from White House officials that no broad trade deal with China was expected to emerge from this weekend’s G-20 summit in Tokyo. Administration officials also stated that the U.S. was not prepared to offer China new concessions. Stocks bounced back in early trading Wednesday following remarks from Treasury Secretary Steven Mnuchin, who estimated that negotiators were “90 percent of the way there” in reaching a deal. Stocks soon surrendered their gains, however.

Also weighing on sentiment at midweek were remarks from Federal Reserve officials, which proved less dovish than many had hoped. On Tuesday, James Bullard, the president of the Federal Reserve Bank of St. Louis and a notable advocate of easy monetary policy, voiced opposition to a 50bp cut in rates in July, as some are advocating. Fed Chair Jerome Powell also stated that the Fed should not overreact to changes in sentiment.

The political implications of Fed policy added another layer of uncertainty and appeared to be merging in potentially alarming ways with trade policy. President Trump stepped up his criticism of Powell and the Fed, tweeting that the central bank “blew it” by hiking rates and was acting like a “stubborn child.” The market consensus seems to be coming around to the idea that Mr. Trump will not sign a trade deal until he gets a rate cut to start a loosening cycle.

The week’s economic data generally missed expectations. Gauges of manufacturing activity in the Chicago, Kansas, and Dallas regions fell unexpectedly into contraction territory, and overall durable goods orders contracted much more than anticipated in May. Consumer personal spending and income recorded solid gains in May. Weekly jobless claims rose a bit more than expected, however, and the Conference Board’s measure of consumer confidence in June fell sharply, hitting its lowest level in nearly two years due to “a less favorable assessment of business and labor market conditions.”

The weak data and geopolitical tensions sent the yield on the benchmark 10-year U.S. Treasury note below 2 percent for the first time since President Trump’s election victory in November 2016.

Overseas, the pan-European STOXX Europe 600, the UK’s FTSE 100, and the exporter-heavy German DAX all rose slightly throughout the week amid hopes that the G-20 summit would ease trade tensions. Chinese stocks softened as traders stayed cautious ahead of a widely anticipated G-20 meeting on trade between President Trump and his Chinese counterpart Xi Jinping.

From the headlines…

“Think of what it could have been if the Fed had gotten it right,” President Trump tweeted last week, imagining huge gains in market indexes and GDP growth in the 4 to 5 percent range. He likened the Fed to “a stubborn child” and said the central bank “blew it.” And he won’t let the issue go. “Here’s a guy, nobody ever heard of him before, and now I made him and he wants to show how tough he is?” Mr. Trump said of Jerome Powell, the Fed chairman, yesterday. “He’s not doing a good job.”Powell has responded, albeit indirectly: “Congress chose to insulate the Fed this way because it had seen the damage that often arises when policy bends to short-term political interests. Central banks in major democracies around the world have similar independence.”

As reported by The New York Times,“The president’s criticism of the Fed comes at an odd moment: As of July 1, the United States will have experienced the longest economic expansion on record, ten years and running. The unemployment rate is at its lowest level in nearly 50 years, and inflation — though quiescent — has at least gotten close to the central bank’s 2 percent goal. By lifting rates from near zero and shrinking the massive volume of government-backed bonds on its balance sheet, the central bank has bought itself precious space to fight the next economic downturn when it comes.”

The Dallas Fed’s manufacturing index fell to the lowest level in three years in June. Trade tensions are clouding the outlook for factories, with 41 percent of Texas manufacturers saying U.S. and foreign tariffs have had a negative impact on business. The weak Dallas report follows soft New York and Philadelphia Fed surveys. U.S. manufacturing is falling fast and hard.

On Tuesday, President Trump announced a new set of sanctions targeting top officials in the Iranian government, including Supreme Leader Ayatollah Ali Khamenei. The measures were called “outrageous and stupid” by Iranian President Hassan Rouhani.Mr. Trump also tweeted that any “attack by Iran on anything American will be met with great and overwhelming force.” How we got here. Russia’s booming stock market and currency, China’s second quarter bounce and Nicolás Maduro’s ability to hold power in Venezuela have flown directly in the face of the perceived power of the U.S. to use sanctions to cajole bad actors on the international stage.

The trade war between the U.S. and China is becoming a major drag on the global economy. At the G-20 meeting yesterday, Presidents Trump and Xi agreed to restart trade talks. It’s still unclear if that is good news (maybe no tariffs) or bad news (rate cuts less likely). Moreover, if Mr. Trump is waiting for a rate cut to cut a China deal, the overall messiness and uncertainty will be difficult to navigate.

Economists are starting to worry about the U.S. jobs market.

Oil closed out its best month since January as crude got a boost from Iran tensions and falling U.S. stockpiles. That rally may get tested next week as OPEC and its allies meet on Monday to agree on an extension to production cuts. Also putting in a stellar performance in June was gold, which netted its biggest monthly gain since 2016.

The collapse in bond yields since this spring has been stark, swift, and global. The drop says investors expect a recession may be looming, and that central banks will have to step in with lower rates to try to forestall it.

S&P 500 companies repurchased $205.8 billion worth of their own stock in the first quarter, according to S&P Dow Jones Indices, the second-highest amount on record based on data going back to 1998, but less than Q4 2018.

Vanguard, the indexing giant, is examining a push into private equity. Goldman Sachs is putting together a 4-unit division with around $140 billion in assets to invest in private companies and other alternative assets like real estate. However, the hedge fund moment is probably over.

Tariffs are a tax on imported goods paid by U.S. businesses that new research from the New York Fed suggests would increase taxpayers’ overall costs by $106 billion a year.

Nearly 70 percent of IRA rollovers are undertaken without an advisor’s assistance.

Americans lose trillions claiming Social Security at the wrong time.