Unlike the 19th century proverb which spoke to the weather entering March like a lion and exiting like a lamb, Fed Chair Jerome Powell's press conference last week ensured the reverse happened for the market's exit from July. Fueled by valuation multiples that have expanded more than 20% year to date & driven 95% of the upside in U.S. stocks, equities continued to grind higher during July on hopes that the Fed would complete its 180 degree turn from December's hawkish policy stance and announce its first interest rate cut in eleven years with guidance of several more to follow. Unfortunately, Chair Powell's history of difficulties in communicating policy intentions continued at his press conference on the last afternoon of July, causing the S&P 500 to have its first 1% down day since the last day of May. Predictably with Powell's more 'hawkish than expected' tone, the US dollar moved to two year highs, gold was clubbed and the yield curve bull flattened. But these price moves didn't even last a day.
The wild ride in markets that began with Q4 of 2018 continued during H1 of 2019, but this year’s version has been a surprisingly good one. Starting with a powerful rally from January to April, followed by an air-pocket in May, stocks then soared to new all-time highs in late June. The big question now is whether stocks keep rising, run out of steam, or lose elevation during this year’s 2nd half.
What a difference a month makes! During late April, complacency was widespread and the S&P 500 ended at a closing high. Now just five weeks later the focus for investors is assessment of downside risk as the S&P is now 2/3rds of the way to a 10% correction. Two concerns account for this reversal. First, trade, as Trump has now added skirmishes with Mexico & India to his fight with China. Second, there’s a growing realization that central banks may not be able to catalyze higher growth and inflation.
Another month and more record highs for North American stock indices. Throughout the month of April it began to feel as though nothing could take stocks down. Be it the barrage of headlines fuelling optimism towards U.S., China trade talks, U.S. Q1 earnings that were generally not as bad as feared (yes, ’not bad’ is the new good for stocks), and a steady stream of dovish rhetoric from central bankers. These variables combined to propel stocks back to the all-time highs seen last fall.