Weekly market update

Stocks stumbled last week amid heightened geopolitical tensions, with traders and investors keeping a close watch over the kickoff of the G20 summit meetings and hoping for a grand deal—or really any deal—they could have swapped cornbread recipes and the markets would like it.

But, boy what a month and first half of the year we had! Especially with all of the concerns out there—trade, oil, North Korea, slowing economically around the globe, tumbling interest rates, inverted yield curves—I could go on…yet nothing slowed down this market. Not only was June the best month for the S&P 500 since 1955, and that’s not a misprint, but it was the best first half going back to 1997.

As far as sector returns, technology has led the way. Followed by discretionary stocks and industrials and healthcare. While energy and utilities were the laggards—though they still did good, they didn’t hold a candle to the leaders.

According to CNBC—the S&P is on track for its best June since 1955, but not all rallies are created equal…just 5 stocks in the S&P 500 account for nearly a third of the index’s rise this quarter. Is a concentrated rally a bad sign, or is there more upside ahead? We’ll see!

Global manufacturing took another knock at the end of the second quarter, signaling a worsening economic growth outlook as U.S.-China trade tensions continue to simmer.

Across Asia and Europe, factory activity shrank in June, China’s manufacturers saw sales, exports and production fall, while Germany suffered from weaker foreign demand. Exports from South Korea plunged almost 14%, and Japan’s Tankan confidence index dropped to a three-year low, yet stocks continue to propel higher.

Here at home, the U.S. economy grew at a healthy 3.1% rate in the first three months of this year, but economists believe growth will slow for the rest of 2019. Regional FED reports aren’t showing the same optimism—take a look at some of the comments coming out of the Dallas region.

Dallas FED respondent: “At this point, uncertainty has reached a point where capital expenditures projects are being delayed or placed on hold.”

Dallas FED respondent: “I don’t care what the indicators say—things are slowing down in energy and manufacturing… Customers are shopping every nickel, quoting and requoting; no one wants inventory”…

And then we have the Federal Reserve—and the futures markets are now pricing in 2 “cuts” by September—2 and with stocks at all-time highs—something is fishy in Denmark and we’ll have to see how it plays out. I can give you an idea—we keep tariffs in place and the economy continues to weaken and then the FED cuts rates and things improve—rinse and repeat…

And then over the weekend – Breaking Headlines – Trade Truce at the G20!

The headline coming out of Osaka at the G20 summit was the fact that President Trump and China’s President Xi Jinping agreed to release positive headlines. That much had been expected. What had not been expected, nor priced into markets, was President Trump’s softening stance on the blacklisting of Chinese telecom giant Huawei, based on national security concerns.

The stunning news, and why global equities have reacted so positively on Monday, is the relaxed stance on Huawei. President Trump stated “U.S. companies can sell their equipment to Huawei. We’re talking about equipment where there’s no great national security problem with it.” Tariffs that are already in place remain in place. In exchange for the relaxed stance on Huawei and the suspension of further tariffs, it seems that China will start buying increased amounts of U.S. farm goods. There does appear to be some evidence of this, as China purchased 544,000 metric tons of U.S. soybeans ahead of the summit this weekend.

So, we are kicking off July with a holiday-shortened week and many traders have already headed for the beaches so it could be a quiet week especially as we have trade tensions easing (for now). We will get manufacturing numbers this week, as well as the jobs report, so maybe the markets can start paying attention to the fundamentals and not every tweet the President sends. We hope you and your families have a safe and exciting Fourth of July, but let’s remember it’s important to reflect on the wisdom and courage of those brave souls who founded America. The values these honorable leaders set forth in the Declaration of Independence—equality, individual rights, freedom and opportunity—are just as important today as they were in 1776.

Happy July 4th!!

Todd Day, MBA
Portfolio Manager
Horizon Financial Services, LLC
July 1, 2019

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