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As people fret about China trade talks, speculate about the timing of Federal Reserve interest rate target cuts, and worry about a potential economic slowdown, the stock market experienced its largest monthly June gain since 1938. The Dow Jones Industrial Average rose a whopping +7.2% for the thirty day period. If we exclude the specific month of June, and focus instead on the first half of 2019, the appreciation is impressive as well. For 2019, the S&P 500 index is up +17.3%, the largest first-half increase since 1997.
As I have noted continually to my readers, there is never a shortage of issues to worry about. When thinking about your investments, or planning your long-term financial plan, it’s best to turn off the television and ignore the headlines. What investors should be focusing on are the four key legs of the financial markets: 1) Corporate profits (currently at record highs); 2) Interest rates (current at/near record lows); Valuations (very reasonable or attractive given rates); and Sentiment (see Don’t be a Fool, Follow the Stool).
With so much to worry about, how can stock prices be sitting at, or near, all-time record highs? Besides the four favorable legs of the aforementioned economic stool, these factors have contributed to the stock market strength:
Trump and Xi Resume Talks: After trade negotiations failed to reach an agreement in May, President Trump and Chinese President Xi Jinping agreed to a trade truce and the resumption of trade discussions after an 80-minute lunch meeting at the Group of 20 Summit (19 countries plus the European Union) in Osaka, Japan. More specifically, President Trump agreed to lift some trade restrictions on Chinese technology company giant, Huawei Technologies Co., thereby allowing American companies to once again sell supplies to the communications equipment company. As both countries race to introduce the next generation 5G communications networks, Huawei strategically sits at the epicenter of these trade negotiations. In exchange for U.S. concessions, the Chinese are reportedly agreeing to immediate purchases of American goods, including 544,000 metric tons of soybeans purchased last Friday.
Federal Reserve Poised to Cut Rates: After nine interest rate increases since late 2015, Chairman Jerome Powell and the rest of the Federal Reserve is poised to cut interest rates this month by 0.25% – 0.50%, depending on how hot or cold economic data unfolds in the coming weeks. Besides the practical benefit of lowering the cost of mortgages, credit cards, auto loans, school loans, and other financial products, lower interest rates effectively act as a rising tide to lift the value of most asset classes (stocks, bonds, real estate, commodities, etc).
Economic Activity Remains Healthy: There have been some signs of economic slowing (e.g., a recent decline in consumer confidence and weaker growth abroad), but the U.S. unemployment rate remains at a generationally low rate of 3.6% (May). As the chart below shows, over the last decade, job openings have risen to record-high levels (blue line) and the jobless rate has fallen to record-low levels (red line). In fact, a shortage of workers could be contributing to the slowing in hiring (i.e., there may not be enough workers available to fill job openings). For instance, the number of job openings (7.45 million) during April exceeded the total number of unemployed by 1.6 million people.
Source: Dr. Ed’s Blog
The economic picture looks even better once you consider the health of consumer households. As the chart below indicates, U.S. household net worth has reached another all-time high of roughly $109 trillion with a “t”. The net worth figure adds up consumers’ financial assets and real estate, then subtracts debt. This record net worth is important because consumer households account for roughly 70% of overall U.S. economic activity.
Source: Calafia Beach Pundit
Summertime is upon us, but that has not prevented gloomy headlines to roll in. With the 2020 presidential elections just around the corner, the contentious debate season has already commenced. Geopolitics surrounding China, North Korea, and Brexit continue to cast shadows. Nevertheless, economic activity remains strong, progress has been made in trade negotiations, corporate profits persist at record levels, interest rates remain accommodative, and attractive investment alternatives to the stock market remain scarce. Until these factors change, investors will keep on enjoying the warm sun and record performance.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (July 1, 2019). Subscribe on the right side of the page for the complete text.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
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