June Monthly Market Commentary
It seems like only yesterday we were welcoming a new year. For many investors, the first half of 2019 has been a welcome sight after a bumpy 2018. And d/espite some pundits trying to discount the rally or arguing the next recession is near, markets are reaching all-time highs. June was a busy month, so sit back and catch up on some highlights.
All Eyes on China
President Trump and President Xi had a much expected meeting during the G20 Leaders Summit . They both agreed to pause escalations, but the tariffs already in place will remain. Taking a time-out from ongoing escalations should make Wall Street happy, but it is important to understand that we are still a long way from a meaningful long-term solution.
Even though the Trump administration claims that the US is winning the trade war, it is important to remember an intense election battle looms next fall and many economic indicators point towards slower growth because of the trade war. President Trump might rely on the condition of the economy to overcome his relatively low approval ratings, so this could lead to a more accommodating approach with China in future negotiations.
Keep an eye on…
• Tech industry, especially semiconductors, are anxiously awaiting further details regarding Huawei. Blacklisting Huawei led to semiconductors reaching correction levels, and even though they have recovered slightly, an accommodating position on Huawei could push these stocks even higher. Huawei is still “blacklisted,” but US companies can now sell to Huawaei, which should be a welcome relief to semiconductors.
• Auto industry, especially Tesla , hope that this pause prevents further escalations. Earlier this year, China imposed an additional 25% tariff on automobiles, and Tesla absorbed the costs. China later paused the increase, and auto stocks hope that the update this weekend continues that pause.
• Industrials, especially farm and construction equipment, have been hit especially hard on both ends of the trade war . From a supply perspective, tariffs have increased their costs. From a demand perspective, the slowdown in the agriculture industry has impacted the buyer of their products.
Escalating Tension in the Middle East
The tension between the US and Iran has been in the news lately, especially after an attack on oil tankers and a drone in June. After calling off an airstrike, President Trump imposed additional sanctions on Iran.
Tensions have been steadily rising since President Trump withdrew from the Iran deal in 2018. This has been a politically charged argument between Democrats and Republicans, so expect it to stay front and center between now and next November.
Keep an eye on…
• Energy companies, especially oil, are hoping we reduce tensions in the Middle East. It is important to keep in mind that roughly 30% of all seaborne oil traffic passes through the Strait of Hormuz. Any further escalations could have a serious impact on the price of oil.
No News Making News at the Fed
With all the attention on recent geopolitical events, it seems like long ago that the Federal Open Market Committee triggered record highs in the stock market by taking a dovish tone . They voted to keep interest rates the same, for now, but set the stage for rate cuts in the not so distant future.
Eight members favor one rate cut this year, eight members favor unchanged rates, and one member favors a rate hike this year. As a result, the market predicts a 100% chance of a rate cut at the July meeting. Besides triggering record highs in the stock market, this drove the 10 Year Treasury rate below 2% for the first time since 2016 .
Keep an eye on…
• Companies that have a large amount of their earnings generated overseas. As interest rates decline, the value of the dollar could depreciate. As the value of the dollar depreciates, American goods become more affordable overseas, which could increase exports.
• Your mortgage, student loan, and credit card rates. Mortgage rates are at the lowest level since September 2017 , which may present an opportunity to lower your long-term costs by refinancing your mortgage.
• Your checking and savings accounts. In anticipation of a Fed rate cut, popular players such as Ally and Marcus by Goldman Sachs lowered the rates on their high yield savings accounts. Even with decreasing rates these high yield savings accounts are still much higher than the national average, but it may be worth paying attention to alternatives.
Stocks Reaching All-Time Highs
Last month, the Dow Jones Industrial Average had its best June since 1938 , and the S&P 500 had its best June since 1955. After a bumpy 2018, the market has had its best first half of the year since 1997. For all the talk of the longest bull market in history, tariffs, an inverted yield curve, and rising deficits the market seems to keep climbing to all-time highs.
There is an old saying on Wall Street, which is “Don’t Fight the Fed .’’ With the Fed seeming to adopt an easy money policy, there are relatively few options for investors that desire yield outside of the stock market. Lower rates reduce the borrowing costs of corporations, which could lead to share buybacks.
At times like this it may be worth remembering a famous quote by John Templeton —“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
Keep an eye on…
• Cyclical stocks such as auto, airline, hotel, and restaurant stocks. More cyclical stocks lead the stock market in a healthy market, so these sectors could outperform as the market continues to rally.
• Political sectors such as healthcare and technology. Even though we are more than a year away from the next election, it appears politics are in full swing. Healthcare and technology stocks have seemed to be in the crosshairs of politicians, so prepare for the market to respond to headlines. Keep in mind that proposals on the campaign trail are difficult to implement when elected, so you might not want to put too much stock in stump speeches.
Crypto Gaining in Popularity
After a sudden spike , people on the internet have been searching for Bitcoin more than Jesus. This search volume is eerily similar to late 2017 and early 2018 when Bitcoin reached its all-time high. Crypto gained more mainstream attention when Facebook announced a cryptocurrency called Libra. Libra’s mission is to simplify and democratize the payments of the entire world.
They aim to leverage revolutionary technology, while backing the value of the currency by a reserve of assets to reduce volatility. It involves major players across a variety of industries in, but there are still significant regulatory and political hurdles over the coming months.
Keep an eye on…
• Volatility. Although cryptocurrencies are gaining more and more attention, the current market value still makes up a relatively small part of the overall economy . To put it in perspective, the market cap of all crypto assets in April 2019 was $180 billion. That may seem like a large amount, but keep in mind that Apple’s market cap at that same time was $964 billion and all the gold ever mined was $8 trillion. Historically, there have been large swings in the value of crypto assets, and investors should expect this to continue as the asset expands.
• Overestimating the benefits of buying different crypto assets. Many investors believe that they can reduce the volatility of crypto assets by investing in many types. Historically, this has not been the case because different crypto assets have moved in similar directions , which is often referred to as positive correlation. The good news is that correlation has been decreasing, but the historical time frame is still relatively small. Just keep in mind that diversifying among many crypto assets might not reduce volatility as much as expected.
The More You Know
If there are 23 people in the same room, there is a 50/50 chance at least two of them have the same birthday . This may seem impossible at first, but it is because of the power of compounding.
Many people look at compounding interest as an investor’s best friend. Keep this fun nugget of information in mind when coming up with your investment strategy, and stay invested over the long term so you can take advantage of the power of compounded growth.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
The opinions and analysis expressed here are those of Brian Walsh, CFP® as of July 11, 2019 and are for informational purposes only. Views may change as market, economic, and other conditions change. This information isn’t financial advice. Investment decisions should always be based on specific financial needs, goals and risk appetites.
SoFi isn’t endorsing, and is not affiliated with the brands or companies listed.
Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.