Market Commentary: Market Recap

Volatile June for markets
June proved volatile, with earlier gains offset by later losses. The S&P 500 rose 0.62 percent, and the Nasdaq Composite gained 0.98 percent. The Dow Jones Industrial Average bucked the trend, declining 0.49 percent. For the quarter, the S&P 500 was up 3.43 percent, the Dow gained 1.26 percent, and the Nasdaq rose 6.61 percent.

U.S. market fundamentals remained positive. According to FactSet, the estimated earnings growth rate for the S&P 500 in the second quarter is 20 percent. This level of growth should encourage further performance.

Technicals were mixed. The S&P 500 and the Nasdaq remained above their long-term trend lines. But the Dow dropped below its trend line for the first time since June 2016.

Foreign stocks did worse in June than the U.S. markets. The MSCI EAFE Index declined by 1.22 percent during the month and by 1.07 percent for the quarter. The MSCI Emerging Markets Index declined by 4.09 percent for the month and by 7.73 percent for the quarter.

Technical factors also weakened during June. The MSCI EAFE Index spent the second half of June below its 200-day moving average. Emerging markets spent almost the entire month beneath the trend line.

Fixed income had a challenging month and quarter, as rising rates negatively affected prices. The Federal Reserve (Fed) voted to hike the federal funds rate by 25 basis points at its June meeting. Further, the Fed statement was more optimistic than expected, suggesting more rates hikes are likely.

The Bloomberg Barclays U.S. Aggregate Bond Index declined by 0.12 percent during the month and 0.16 percent for the quarter. The 10-year U.S. Treasury yield started the quarter at 2.73 percent, reached a high of 3.11 percent, and ended the quarter at 2.85 percent.

High-yield bonds had a better month and quarter than did investment-grade fixed income. The Bloomberg Barclays U.S. Corporate High Yield Index gained 0.40 percent during the month and 1.03 percent during the quarter. Spreads remained in the 3-percent to 4-percent range during the quarter.

Employment and spending show strong growth
Consumer confidence declined slightly in June, but major measures of confidence remain near multidecade highs.

May’s employment report was strong, with the economy adding 223,000 new jobs. The unemployment rate fell to an 18-year low of 3.8 percent, and the underemployment rate declined. Wage growth increased to 2.7 percent on an annual basis.

Overall consumer spending grew by 0.6 percent. The retail sales data was better, with 0.8-percent headline growth in May. The core figure, which strips out vehicle purchases, rose by 0.5 percent on a month-over-month basis. This rise brought year-over-year core retail sales growth to its highest level since early 2012 (see Figure 1).

Figure 1. Core Retail Sales, 2007–2018

While consumer spending was strong, business spending was mixed. Durable goods orders for May dropped by 0.7 percent, due to a 7-percent decline in the volatile transportation sector. The core figure, which excludes transportation, fell by 0.3 percent in May. Despite the weak month, the quarterly figure looks healthy.

Housing a drag on growth
After a multiyear period of solid growth, housing appears to have slowed. On the supply side, home builder confidence dropped in June, and building permits fell by 4.6 percent during the month. On the demand side, new home sales rose by more than expected in May, but existing home sales dropped slightly.

Political risks continue to affect markets
Politics and policy present risks to the markets. Last month’s concerns surrounding a euroskeptic government in Italy and the summit between President Trump and North Korea’s Kim Jong-un have largely subsided. But these improvements have been overshadowed by concerns about trade, including the U.S. imposition of tariffs and the subsequent retaliatory actions from most major global economies. It’s likely a deal will be reached before matters become more serious. If the situation does worsen, though, it will almost certainly lead to lower levels of growth both domestically and abroad.

Economic growth expected to continue
While political risks and a slowdown in housing are a concern, the U.S. economy continues to grow. The tailwinds from tax reform and the jobs market are driving consumer and business spending, which should lead to faster economic growth.

Of course, risks can materialize. As such, a well-diversified portfolio is the best way to prepare for the future.

All information according to Bloomberg, unless stated otherwise.

Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.

Market Commentary