Monday Morning QB – Market Observations:
- Momentum putting Stocks on Pace for Best June in 50 Years
- Federal Reserve Readies a More Accommodative Approach…A July Rate Cut is in the Air
- Hope and Enthusiasm Prevail ahead of Trade Talks between Presidents XI and Trump…Let’s Keep the Momentum Going
- Combination of Headlines (The Fed & Trade Talks) Creates Momentum in Stock Market
- S&P 500 is up over 7% in June
- Crude Oil Rallies on Tensions with Iran
- This Week’s G20 Meeting of World Leaders on June 28th and 29th Will Highlight the Need for Global Monetary Stimulus and a Solution with Iran
- If You Have Underperforming Stocks in June Considering Cutting the Cord
Monday Morning QB – Market Performance:
The Federal Reserve helped the momentum story for stocks in June.
The Fed held interest rates steady and reinforced investor expectations for an interest rate cut later this year, powering strong gains for stocks and lifting the large-cap S&P 500 index to a new record high.
The Dow Jones Industrial Average surged 629 points to 26,719, a gain of 2.4%. The technology-heavy NASDAQ Composite rose over 3% regaining the 8,000-level and closing at 8031.
By market cap, the large-cap S&P 500 index rose 2.2%, while the mid-cap S&P 400 gained 1.5% and the small-cap Russell 2000 added 1.8%.
So Far the Typical June Swoon for Stocks is Non-existent in 2019
Instead of the market going into a lull for the summer (June Swoon), a three-part momentum may be creating a perfect storm for stocks.
First, we needed more accommodative (dovish) language from the Federal Reserve. Fed Chair Jerome Powell in his prepared statement and remarks, delivered the “rate cut” optimism that investors were looking for.
Secondly, we needed some positive movement in the U.S.-China Trade front. A Trump tweet about a private meeting was enough to start a rally last week.
An extended meeting between the two leaders, followed by a hopeful joint statement, will likely start the next wave of advancement for stocks. Wouldn’t another 2% week be nice!
Lastly, another better than expected earnings season that takes the S&P 500 above 3000 starting the second week of July could be the icing on the cake.
Let’s look at each of these pieces.
The Fed-Fueled Momentum Rally
The Federal Reserve two-day dance ended last week on Wednesday with a steady hold on interest rates for now.
A rate cut last week would have dialed up the stock market feeding frenzy. Investors would have likely piled into stocks. For now we will have to settle for the likely cut to come after their two-day meeting at the end of July.
Oh, and last week was still pretty good for the stock market!
The certainty of the rate cut forecast came from the mouth of chairmen Powell, who said, “It’s really trade developments and concerns about global growth that are on our minds.”
The Federal Reserve statement omitted the word “patient” in describing their current stance on guidance regarding their interest rate plans. (Certainty can also be part of your chosen omissions.)
Of course, what they did choose to say is important as well. The Federal Reserve included the rate cut announcement language best described as a bad poker player’s tell about what cards are in his hand.
The Fed said, “Uncertainties about the economic outlook have increased.” This phrase has been used in past periods to cut rates. The use here was not an accident.
Chairman Powell closed with noting the Federal Reserve will react quickly and aggressively to any weakness.
The Federal Reserve knows that everything they say and choose not to say is carefully parsed. The stock market got what it was looking for.
With a rate cut all but in the books for July, all eyes will turn to the G20 Summit and the highly anticipated meeting between President Trump and Chinese President Xi Jinping.
Keep the Momentum Going – It’s Time to Play “Let’s Make a Deal”
What can I say about the future? Not much. No one knows how this week will play out.
The stock market likely does not have to see an agreement in place between China and the U.S. to push the market higher.
The talks have all but stalled, so the bar for the two Presidents’ side meeting during the G20 Summit is low. Any language from both that hints toward progress will likely be enough to move the market higher.
Without such a statement at the end of their private meeting the market will likely move lower.
The million-dollar question is, “How much lower?” now that the Federal Reserve has hitched its rate cuts to the outcome. Could a bad meeting lead to a 0.5% percent cut versus the expected 0.25% percent cut at the end of July? A little extra juice for the stock market, perhaps?
As mentioned above, the Fed will not meet again until the end of July. The rate decision at the time will come from the benefit of seeing how the trade talks progress as well as the beginning of the earnings season. The Fed will have plenty of data to mull over before making their decision.
Earnings Season to Complete the Momentum?
The stock market may benefit from bad news or from good news.
If the trade talks resume with earnest or the earnings season meets or beats expectations, the stock market will likely continue the momentum.
However, if neither of these events occurs the Federal Reserve will cut rates perhaps by 0.5% percent. Rate cuts typically create momentum for stocks.
Either scenario will likely benefit the stock market.
Momentum Playbook – Sell Your Losers
With momentum fueling the stock market into an unsettled nervousness about where stocks go from here, the question is what to do with your current investments.
Many investors have been running from the stock market to join the bond market rally. Bond prices have risen as interest rates declined. What worked in May has fallen flat so far in June. The stock market momentum is biased to the upside now.
If you stayed invested through the May drop and the June revival to a new high on the S&P 500, then you have some valuable data to help in your decision-making.
A timeless investing adage comes to mind. Let your winners run and sell your losers.
When the S&P 500 Index hits a new 52-week high, it’s easy to tell your winners from your losers. For the S&P 500 to hit new highs, many of the stocks that make up the index must be hitting new highs as well.
So, review the stocks within your portfolio. Keep your stocks that are making new highs and sell the ones that have not.
If a stock fails to make a new high along with the market or worse has not participated in the June rally then there is something wrong there.
Time to cut bait. Sometimes the obvious cannot be overstated. Let your winners run and sell your losers.
The same rationale can be applied to mutual funds and exchange-traded funds within your portfolio. If they are underperforming then let them go!
(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.wantchinatimes.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, WE Sherman & Co, LLC)