weekly market commentary

Weekly Market Commentary – July 22, 2019

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The S&P 500’s steady climb took a pause last week as quarterly earnings reports and Fed comments drew the greatest attention from investors. The S&P 500 dropped 1.2%. The MSCI ACWI slid 0.6% as international stocks regained some ground after last week’s underperformance of U.S. markets. The Bloomberg BarCap Aggregate Bond Index climbed 0.4%.

interest rates

Key Points for the Week

  • Expectations are for the Fed to cut rates by 0.25% at its meeting next week.
  • Earnings are beating expectations by more than usual.
  • Retail sales beat expectations as the U.S. consumer remains confident.

A Series of Surprises          

Investment markets were punctuated by a series of surprises last week. The first surprise was retail sales rose at a faster-than-expected pace. Retail sales climbed 0.4% last month, far ahead of expectations. Core retail sales, which exclude certain volatile items, such as automobiles and gasoline, rose 0.7%. Over the last year, retail sales have risen 3.4%. The U.S. consumer continues to benefit from a strong job market and solid pay increases. While investment markets stew about inflation risk, the consumer continues to provide support for the economy through steady spending.

Earnings were also surprisingly to the upside. For second quarter 2019, 79% of companies beat expectations and generally by significant amounts. Earnings estimates forecast a decline at the start of the quarter, but if results continue to beat expectations, S&P 500 earnings will likely increase from one year ago.

The final surprise was a speech by John Williams, president of the New York Federal Reserve. Williams spoke about the timing of interest-rate cuts in a slowing economic environment when rates are already low. Perhaps not the most interesting topic at dinner parties, except the Fed meets later this month to address this exact scenario.

Williams concluded that monetary policy is more likely to be effective in this environment if swift, large moves are made at the beginning of the cutting cycle. His speech was interpreted as an indication the Federal Reserve is more likely to cut rates by 50 bps. The accompanying chart shows a sharp spike in the odds that rates would move to a range between 1.75% and 2% in the July meeting.

It turned out this surprise wasn’t planned. Williams was speaking in a broad historical context and was not suggesting the conclusion — as noted in a hasty clarification by the New York Fed. Expectations quickly retreated to previous levels the next day, and a cut of 0.25% remains the most likely outcome.

It was a week full of surprises. Consumers, corporations, potential customers and government officials have the ability to move markets in surprising ways. Markets have been quite calm lately. This week reminds us to be ready for the unexpected.

Fun Story

Penny for Your Thoughts

Coin collecting is a lot more fun when you find a rare $200,000 penny in your change. In 1943, Don Lutes of Massachusetts received a penny from his school cafeteria. It turned out the coin was a rare bronze penny that was accidentally issued during World War II when the metal mix was adjusted to preserve copper for the war effort. Lutes kept the coin until his death in 2018, and it sold at auction in January for $204,000. Lutes’ coin was rare, but there are others potentially even more valuable still out there. Maybe even in your pocket.

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