Weekly Market Commentary – June 24, 2019

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The S&P 500 continued its strong June performance and reached a new high Thursday, before inching lower on Friday. The openness of the Federal Reserve to cutting rates at its next meeting, along with renewed optimism on trade, shot markets higher. The S&P 500 climbed 2.2% for the week. The MSCI ACWI gained 2.4% as international markets performed well. The Bloomberg BarCap Aggregate Bond Index rose 0.4% as bond prices typically increase when yields fall.

Key Points for the Week

  • The S&P 500 eclipsed its previous high on optimism a Fed rate cut and trade discussions will keep the economy strong.
  • While the Fed held rates steady this week, it signaled it is likely to cut rates at its July meeting.
  • A scheduled meeting between Presidents Trump and Xi at the G-20 summit renewed optimism of a trade deal.

S&P 500 Total Return 

Fed Paves the Way for a Cut, and the S&P Reaches New Highs

To few people’s surprise, the Fed paved the way for an interest-rate cut in July. While holding rates steady at its meeting this week, the Fed’s press release struck a less optimistic tone and suggested the Fed would act to support growth. Expectations for a cut in July had been high, but after Fed Chair Jerome Powell’s dovish comments, expectations heightened further.

The Fed stated, “Economic growth is rising at a moderate rate.” At the previous meeting, the Fed described growth as “solid.” Household consumption remains solid, but business investment has softened. Much of the slowing is due to the uncertainty about trade.

The slowing growth has also pressured the Fed’s outlook for inflation. The Fed lowered its projections for its preferred inflation measure, core PCE, to 1.8% from 2%. Most of the Fed governors do not believe inflation will not reach its target rate of 2% without cutting rates.

Investors cheered the Fed’s change in outlook. The S&P 500 hit a new high on Thursday and is up more than 7% for the month. The new high reflects optimism the Fed’s expected interest-rate cuts will act as insurance by protecting the long period of economic expansion. The new high eclipses the previous high set on May 4. Interestingly, lower-volatility sectors have helped drive the S&P 500 to a new high. Utilities, health care, and real estate have been the top performers.

In the long run, the new high reflects our view that most challenges are met with solutions good enough to allow markets to continue to produce solid risk-adjusted returns. In the short run, June’s performance assumes the Fed is cutting rates soon enough for economic growth to stay strong and for a trade deal to be finalized in time to spur growth. That outlook seems optimistic.

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