The twin narrative of a dovish Fed and optimism surrounding a potential trade deal at the G20 spilled over into small cap stocks (hallelujah!) as the Russell 2000 jumped 1.09%. The S&P 500 slipped modestly for the week, but posted its best June since 1955 with a 6.89% gain.
Before we uncork the champagne bottles, it’s worth remembering that May was not very merry, and we are essentially back to the levels of the end of April.
Or the end of September for that matter. I’m focusing on that time horizon because that’s when trade and Fed policies took center stage.
The picture is worse for small cap stocks over that period of time.
The University of Michigan (Gottlieb) consumer sentiment index for June came in at 98.2, down from 100 in May. Consumers’ assessment of current conditions actually rose a bit, rising to 111.9 from 110, but the index of consumer expectations fell to 89.3 from 93.5. In the past that dispersion between current and future consumer sentiments has been a pretty reliable forecaster of an upcoming recession. The silver lining of the economic slowdown is the downward pressure on interest rates. The yield on the Ten-Year Treasury declined 6 basis points to settle at 2% on the nose. A series of Fed comments trimmed hopes of a 50-basis point cut in July, but more or less guaranteed a 25-basis point cut at that meeting, with the high likelihood of two more cuts before the end of the year. The very low interest rates combined with record corporate profit levels make up the case for equities at current levels of around 17x forward earnings estimates.
As for the China trade talks, I once again reference Professor Aliber’s comment that the U.S. and China will be negotiating trade terms “until the end of time”. In the latest dialogue, President Trump has softened his stand on Huawei, which should help the Chinese save face in making concessions.
Related: How Long Can the Market Ignore the Troubling Headlines?
The takeaways from The G20 will set the tone in the holiday-shortened trading week. President Trump told reporters on Saturday that the trade talks were “right back on track”, so investors will likely be able to enjoy their July 4th parties without worrying about additional tariffs on their BBQ grills. The Institute for Supply Management will release its Manufacturing Index for June on Tuesday, with forecasts of a 51 reading down from May’s 52.1, but still barely signaling expansion rather than contraction. On Friday the Bureau of Labor Statistics will release the June jobs reports, which is expected to recover to 180,000 new jobs from 75,000 the month earlier.
Stocks on the Move:
Equities Contributor: IRIS.xyz
Source: Equities News