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Weekly Market Update — June 10, 2019

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MARKETS JUMP TO BEST WEEK OF THE YEAR ON NEWS THAT THE FED MIGHT CUT
SHORT-TERM RATES IN 2019

  • The stock market had its best week and its best daily gain in 2019, as the week ended with the DJIA jumping 4.7%, the S&P 500 leaping 4.4%, NASDAQ moving up 3.9% and the smaller–cap Russell 2000 advancing 3.3%
  • In addition to sentiment that the market was over–sold during the month of May, which saw four consecutive weekly declines, expectations that the Federal Reserve will cut rates in 2019 turned the markets very green
  • All 11 S&P 500 sectors finished positive this week, with the Materials sector spiraling up 9.1% to lead and the Communication Services sector bringing up the rear with a 0.9% gain
  • Fed Chair Jerome Powell acknowledged concerns about trade tensions publicly, but further stated that the Fed will act as appropriate to sustain the economic expansion
  • The market saw Powell’s remarks as a clear sign that the Fed would cut rates at its July meeting and the fed funds futures market sees an 85.6% chance of a rate cut at that July meeting
  • Nonfarm payrolls increased by just 75,000 as expectations were for more than double that, but average hourly earnings increased 0.2%
  • Fed Chair Powell’s remarks, tepid jobs numbers and increasing expectations for a 2019 rate cut sent the 2–yr yield down ten basis points to 1.84%
  • The 10–yr yield declined four basis points to 2.08%
  • The U.S. Dollar Index fell 1.2% to 96.58
  • WTI crude reversed last week’s course and increased 0.8% to $53.92/barrel
  • After the markets had closed, President Trump announced a deal with Mexico that will eliminate the need for tariffs going into effect on Monday

Weekly Market Performance

Equities Jump on Fed’s Remarks

The major U.S. equity markets and developed, international markets jumped back from May’s doldrums on the thought that was unthinkable just a few short months ago – that the Federal Reserve would cut short–term interest rates later in the year.

In fact, during the 4th quarter of 2018 and the 1st quarter of 2019, the conversation was more around how many times the Fed would increase rates this year and hardly anyone was suggesting the Fed might reverse course. News of Fed Chair Powell’s remarks pushed the broad-based and large–cap S&P 500 Index to its best week of the year and left it within about 3% of its all–time high.

But Wait, There’s More…

Besides turning in the best week of the year so far, Tuesday marked the best daily 2019 performance for the major U.S. markets as well. And it was Tuesday that Powell’s remarks were made, when he stated at a central bank conference that the Fed was paying close attention to the impact of trade tensions and tariffs on the U.S. economy and would “act as appropriate to sustain the expansion.”

Right after Powell’s comments, futures markets began pricing in a massive likelihood of a rate cut announcement after the Fed’s July monetary policy meeting.

Green Sectors All Around

The week started on a negative foot as worries about the major tech players were on Wall Street’s collective mind following reports that antitrust officials were preparing investigations into Apple, Amazon, Facebook, and Google. The House Judiciary Committee also announced its own investigation on Monday.

But the markets quickly shook off those worries and the week ended with all 11 S&P 500 sectors returning gains, led by the almost 10% jump in the Materials sector.

As one might expect, the more defensive names like Utilities and Real Estate lagged the overall markets, but still returned 2.89% and 2.62%, respectively.

For the 3–month period and YTD period, all 11 S&P 500 sectors are green, except for the 3-month number for the Energy sector, which is down over 5% as oil prices continue to decline.

Payrolls Cool Somewhat

Data to support the Fed’s thesis that the U.S. economy is slowing was released throughout the week, as Wednesday saw ADP report that private sector payrolls only grew by 27,000 during May, which ADP reports is the smallest monthly gain in about 9 years. Then on Friday, the Labor Department announced that overall, payrolls expanded by 75,000 in May.

The unemployment rate is still holding at a 50–year low while average hourly earnings rose, but a little less than expected.

This data provided reasons for the change in Fed policy and by the end of the week, the CME Group reported that the futures markets were pricing in a 98% probability of a rate cut in 2019, along with a with an 85.6% chance of a cut by the end of July.




Sources

adp.comdol.govcmegroup.comfactset.comstatista.com.comstandardandpoors.com;
nyse.comfederalreserve.govmsci.comnasdaq.comdowjones.commorningstar.com;
edwardjones.combloomberg.com



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