For the first time since March, on July 3, all three major stock-market indexes — the Dow Jones Average, S&P 500 and tech-heavy NASDAQ — set all-time records on the same day.
A sensational June that saw the major averages jump 7 percent and a cordial meeting between President Trump and Chinese leader Xi Jinping at the G-20 meeting in Osaka, Japan, on June 29 sparked a 2 percent market gain July 1-3 that sent stock averages to their highest numbers ever!
President Trump, responding to a Chinese reporter after the meeting, said: ”I think we are going to be strategic partners. I think we can help each other.” Chinese leader Xi was also equally upbeat when he stated that “the two sides are highly harmonious and the areas of cooperation are broad.”
The agreement means that trade negotiations will resume and that the President will continue to delay his threatened additional 25 percent tariff on about $300 billion of Chinese exports. (However, the current 25 percent tariffs targeting $250 billion of Chinese products will remain.)
He also eased sanctions on U.S. sales of sophisticated technology products by American tech companies to Huawei, the Chinese telecommunications company that is the world leader in 5G technology and mobile phone sales. The president claimed that China would import a massive amount of U.S. farm products so that “in the end, the farmers are going to be the biggest beneficiary.”
Trade continues to be a crucial concern. When the news is positive, the market rallies as it did July 1-3. However, when the President threatened May 10 to close the border with Mexico, a big selloff sent the market plunging 6 percent for the month.
(The U.S. imports from Mexico an astounding $40 million worth of goods per hour. One reason is that its low prices are made possible by the country’s low wages. Mexico is currently raising its minimum wage by 16 percent to $5.10 per day.)
Despite the May decline, a positive April and a sensational June produced a 4 percent increase for U.S. stocks last quarter. The 7 percent rise last month was the best June for the Dow since 1938 and the highest return for the month for the S&P 500 since 1955.
Coupled with the first quarter’s double-digit rise and last quarter’s uptick, the Dow is up 14 percent for 2019’s first six months, the S&P 500 has risen 17 percent and the NASDAQ leads with a 20 percent first-half return. The small-cap Russell 2000 rose 16 percent, and overseas stocks did well too, gaining a solid 14 percent average so far this year. (Technology stocks have done best — jumping 26 percent for the year.)
Perhaps two key reasons for the stock market’s June jump were low interest rates and continued low inflation. The 10-Year U.S. Treasury Bond interest rate fell to 2 percent as the quarter ended and inflation remained well below the Fed’s target 2 percent rate.
As the world’s economy continued to slow, it became clear that the Fed will probably cut interest rates at least two times this year. I am fairly sure that when the Fed meets July 30 and 31, it will reduce rates by one-quarter percent.
U.S. GDP growth for last quarter is now being estimated at 1.5 to 2 percent, well below the first quarter’s strong 3.1 percent number. Last month, Vanguard lowered its second-quarter estimate from 2 percent to 1.7 percent. Overseas, Japan’s GDP growth is about 2 percent, but Europe, Brazil and Mexico — are 1 percent or less.
Because worldwide inflation is extremely low, it is apparent that the world’s four largest central banks — our Fed, the European Central Bank, the Bank of England, and the Bank of Japan — are committed to very easy money policies.
It seems clear that U.S. manufacturing is slowing considerably. The Empire State (New York) manufacturing index had its biggest one-month decline ever since records began in 2001. Across the country in Texas, the Dallas Fed’s manufacturing numbers dropped to a 3-year low.
Also discouraging was the drop in the ISM non-manufacturing index to 55.1 (50 is neither growth or decline), its lowest level since July 2017.
According to a June survey of 384 CEOs, business confidence is now the lowest this year. Sixty percent of its members contacted in May by the National Association of Business Economists are predicting a recession by the end of 2020.
I tend to disagree. There are 7.3 million reported job openings, and our 3.7 percent unemployment rate is near 50-year lows. This month, the economy expanded for its 121st month, the longest ever since records began in 1854. (The previous longest time without a recession was 120 months from 1991-2001.)
Unlike the last recession in 2008-2009, the nation’s big banks are rock solid. Last month, the Fed reported that “the nations largest and most complex banks have strong capital levels that would allow them to stay well above their minimum requirements after being tested against a severe hypothetical recession.”
Consumer spending is two-thirds of the economy. The Atlanta Fed estimates that real personal consumption will be up 3.2 percent last quarter compared to only a 1.3 percent gain for 2019’s first quarter. One reason is that wages are rising at slightly over 3 percent. May’s personal income growth beat expectations by rising one-half percent, and June new car sales only fell 2 percent from their good May levels.
Given the awesome first half of this is year and that typically July to September is the weakest quarter, it is unrealistic to expect another 3-4 percent gain or better this quarter. Also, corporate profits for the second quarter are forecast to be flat. Slower worldwide economic growth and concerns over trade are two reasons that 87 out of 113 companies that had issued guidance for the second quarter by June 30 have lowered their expectations.
However, lower interest rates are positive for stocks and a final settlement to the U.S.-Chinese trade dispute would give stocks a strong boost. Stock returns during third years of presidential terms are typically terrific. The 23 third years since 1927 have averaged an incredible 16 percent.
Certainly, no one can predict stock prices. My best guess is that, unless we conclude a trade deal with China, market returns for this quarter will be flat or slightly negative. Obviously, we should be thankful for all the money we have made so far this year.