Mixed Messages | The WMA Weekly Market Wrap

June 25, 2019

President Trump opened his campaign for reelection last week and the strength of the American economy was his lead argument.

“Our country is now thriving, prospering and booming. And frankly, it’s soaring to incredible new heights. Our economy is the envy of the world, perhaps the greatest economy we’ve had in the history of our country. And as long as you keep this team in place, we have a tremendous way to go. Our future has never ever looked brighter or sharper.”

The stock market seems to agree. Last week’s surge in stocks (the S&P 500 and the Dow both reached all-time highs last week) underscored confidence on Wall Street that the U.S. economy and global markets remain healthy. Stocks are on pace for their best June in more than half a century. Broadly speaking, the economy *is* strong, if not as strong as it was, as last week’s Federal Reserve policy statement emphasized.

On the other hand, Mr. Trump also characterizes the economy as so fragile that it requires significant interest rate cuts from the Fed. He has repeatedly urged the Fed to cut rates and take additional steps to stimulate economic growth. Responding to the Fed’s announcement last week that it was prepared to cut rates in the near future, Mr. Trump said, “They should have done it sooner, but what are you going to do?”

The bond market seems to agree. After the Fed meeting, demand for U.S. government debt drove the benchmark 10-year U.S. Treasury yield down to below 2 percent before settling at 2.07 percent at last week’s close. In the last seven months, 10-year yields have dropped 120 basis points. The Bank of America Merrill Lynch monthly fund manager survey named “long Treasuries” as the most overcrowded trade in the world. Lower yields suggest the economy isn’t humming along as strongly as previously believed.

Messages are highly mixed — from the president, the Fed, the stock market, and the bond market.

The Fed’s reinforcement of trader expectations for an interest rate cut later this year powered strong gains for domestic stocks last week. While the tech-heavy Nasdaq outperformed the broad market, large-cap defensive sectors that pay relatively high dividends, such as utilities, also posted healthy gains.

Geopolitical tensions in the Middle East continued to ratchet higher, driving large gains in crude oil prices as well as energy sector stocks. News that Iran shot down a U.S. drone helped push the price of West Texas Intermediate crude, the U.S. oil benchmark, up more than 5 percent on Thursday alone.

Sentiment about the trade dispute between the U.S. and China seemed to shift positively, providing another source of support for stocks. On Tuesday, President Trump said that he and Chinese President Xi Jinping would have “an extended meeting” at the G-20 conference next week in Japan. Traders hope that renewed negotiations will help avoid tariffs on additional Chinese goods imported by the U.S.

European stocks also rose last week, buoyed by anticipation of more central bank stimulus measures. The pan-European STOXX Europe 600, UK’s FTSE 100, the exporter-heavy German DAX, and Italy’s FTSE MIB all gained as ECB President Mario Draghi signaled that the bank could offer more stimulus measures as early as July if growth continued to stall.

In Asia, Chinese stocks advanced strongly for the week too, as traders bet that a meeting between President Trump and his Chinese counterpart Xi would lead both countries to resume trade talks that broke down last month. The benchmark Shanghai Composite gained 4.2 percent and the large-cap CSI 300, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, added 4.9 percent.

From the headlines…

At last week’s policy meeting, Federal Reserve officials held interest rates steady but strongly suggested they would cut them in the months ahead if an economic outlook clouded by uncertainty over trade policy didn’t improve. St. Louis Fed President James Bullard dissented from the decision, preferring lower rates immediately. It was the first dissenting vote cast since Jerome Powell became Fed chairman in February 2018. Interest-rate projections released by the central bank showed eight of 17 officials — the reserve bank presidents and board governors who participate in the Fed meetings — expect they will cut the benchmark rate by year’s end from its current range between 2.25 and 2.5 percent.

European Central Bank President Mario Draghi signaled the bank could cut interest rates or expand its giant bond-buying program as soon as its next policy meeting in July.

In Europe, manufacturing is slumping and recession worries are on the rise.

President Trump and Chinese President Xi Jinping agreed to meet in Japan next week, buoying financial markets and spurring hopes for a trade truce.

It isn’t just China. The U.S. and India have hit a rough patch over tariffs too.

Bank of America’s monthly investor survey makes for grim reading. Still, with 496 S&P 500 companies having reported first quarter earnings, more than three quarters (75.6%) beat expectations, with Q1 earnings now expected to increase 1.6 percent, data from Lipper shows.

The U.S. was preparing to launch a retaliatory strike against Iran for shooting down an American reconnaissance drone last week, but the mission was called off at the last minute.

Gold futures climbed 3.6 percent on Thursday to $1,392.90 a troy ounce, their biggest one-day advance since June 2016 and highest settle since 2013.

An economics lesson from Taylor Swift.

Americans gave less money to charities last year, partly because tax law changes made many people ineligible for tax breaks that can inspire donations. Total estimated giving, by corporations, foundations, as well as individuals, fell about 1.7 percent, after inflation, to $427.7 billion.