Weekly market update
Stocks continued to add to this year’s gains last week following a truce being declared between China and the U.S. on trade. On Wednesday, the Dow, S&P and NASDAQ closed at record levels ahead of Independence Day. Investors did throw some shade on stocks to close out the week following a much stronger than expected jobs report where the economy added 224,000 in June. But why did stocks sell-off on that strong jobs report?
The FED fund futures had been pricing in a 50-basis point cut from the FED when they meet this month and after that jobs report, a 50-basis point cut was all but ruled out; however, a 25-basis point cut is still widely expected.
That strong jobs report following May’s horrible jobs number does support the idea that the economy is slowing and not stalling, and that any rate cut from the FED right now has to be justified on the basis of falling inflation rather than fears of an imminent recession. This week’s CPI data should confirm a trend of very low inflation, and FED Chair Powell’s congressional testimony this week could shape the market’s expectations as to whether low inflation will indeed be enough to push the FED to cut rates at this month’s meeting.
While the markets would likely welcome lower rates, this probability has to be weighed against relatively high valuations in stocks and bond markets, and suggest a need for a balanced approach going forward.
More on the economy last week—JPMorgan Global June Manufacturing PMI was at 49.4 vs. 49.8 in May, and that is the lowest reading since October 2012.
Non-manufacturing ISM numbers slipped to 55.1 in June from 56.9 previously. Growth is slowing but it is not falling off of a cliff. U.S. factory orders fell for the second month in a row (and down 3 of the last 4), down 0.7% MoM in May, following April’s 1.2% decline (revised lower). More notably, factory orders year-over-year growth has contracted (by 1.2%) for the first time since August 2016.
So, we received more signs of a slowing economy last week, outside of the jobs report, all the while stocks and bonds have been screaming higher on the assumption that the FED has got the stock market’s back—well—I sure hope the FED doesn’t disappoint the markets. But something has to give.
Stay tuned and we’ll keep you posted. I will be out of the office next week, so the next market update will be the week of the 22nd.
Todd Day, MBA
Horizon Financial Services, LLC
July 8, 2019