The markets were strong in June and recovered well from the widespread losses seen in May. In fact, all major global equity and fixed income indices posted positive returns, including the S&P 500, which climbed 7% for the month.
The big news in June came at the hands of the Fed’s comments that suggested it is more receptive to cutting interest rates to help prolong the economic expansion. Markets now view a rate cut as a virtual certainty, and the U.S. is not alone, as central banks around the world are shifting toward easier monetary policy in an effort to combat slowing growth. In fact, Bloomberg recently reported that $13 trillion (or 24%) of global investment-grade debt now boasts negative yields.
One key dynamic weighing on global growth is the uncertainty associated with the trade war. Recall tensions between the U.S. and China escalated last month, and talks had essentially stalled out through the first several weeks of June. In the final days of the month, the U.S. and China reached a truce and agreed to continue trade discussions. The markets viewed this favorably, though we would emphasize that there is still no long-term agreement in place, and we would not be surprised to see continued volatility as both sides negotiate.
While discussions between the U.S. and China have taken center stage, President Trump also threatened tariffs on Mexican imports in late May unless Mexico took action to curb illegal immigration across the southern border. Fortunately, by early June, Mexico made promises that appeased Trump, and tensions deescalated quickly.
While central banks around the world ease monetary policy in an effort to stimulate demand, we question whether these actions alone will be sufficient to foster a continued economic expansion. After all, how can corporations have the confidence to make investments – even if they are able to finance them at lower rates – when they have no conviction on global trade policies? Suffice it to say, we believe a resolution to the trade war is key.
Another potential byproduct of the trade war and/or the weakness in the markets last month was the June consumer confidence reading, which dropped 10 points from the prior month to 121.5 – making it the biggest decline since December. In spite of the large decline, consumer spending remains strong, and unemployment remains at 50-year lows.
Finally, we’d also call attention to the rise in tensions between the U.S. and Iran, which has contributed to a rally in oil prices of approximately 9%. Though the situation seems to have simmered down for now, the political landscape remains unpredictable, and we would not be surprised to see continued volatility in the relationship between the two countries.
The monthly Market Overview is written by two members of MACRO’s Investment Committee: Mark Cortazzo, CFP®, CIMA®, and Christopher Moffett, CFA.