Notes from the Trading Desk: July 2019
The major U.S. Indices began the third quarter on a high note. The S&P 500, Dow Jones Industrial Average and the Nasdaq spent much of the week in rally mode. As a result, they are all trading at all-time highs. For the week, the Nasdaq led the way higher as it was up 1.94%. It was followed closely by the S&P 500 — up 1.65%. The Dow was up 1.21%, while the Russell 2000 was the laggard — up only 0.58%. Communication Services and REITs were last week’s best performers, though they were followed closely by Tech, Consumer Staples, and Consumer Discretionary stocks. According to FactSet, the market is now placing a 100% probability of a Fed rate cut at the July meeting. More specifically, the probability of a 25 bps cut is 97.4%, while a 50 bps cut is only 2.6%. Just one week ago, there was a 31.6% probability of a 50 bps cut. Friday’s strong jobs report was clearly enough to shake the market’s hope that the Fed will cut rates by 50 bps in July. As a result, yields spiked higher on Friday across the curve.
As Notes from the Trading Desk has been on a brief hiatus, let us start with a review of the current market and economic backdrop. The S&P 500 is trading at an all-time high and is up more than 19% YTD. In 2018, Cash and Fixed Income were the only major asset classes with a positive return (1.82% and 0.01%, respectively). In 2019, nearly all major asset classes are up. The Barclays US Aggregate Total Return Index — a broad-based fixed income index — is up 6% YTD. Gold is up more than 10%, Emerging Markets and International markets alike have gotten in on the action as well, and nearly all equity indices have rallied this year. It has been a great year for investors in 2019 thus far as nearly all corners of the market have experienced positive price appreciation. What’s more, the unemployment rate at 3.7%, though at a slight uptick from the cycle low of 3.6%, is still basically the lowest unemployment rate since the late 1960s. As long as we do not slip into recession by the end of the month, we will find ourselves in the midst of the longest expansion in US history. According to CNBC, June 2009 – July 2019 will mark 121 months of expansion, longer than the previous record set from March 1991 to March 2001. In June, the U.S. Economy added 224,000 jobs, which continued the record pace of job growth with 105 consecutive months. Everything seems to be getting along just fine. So then, why is the Federal Reserve set to cut rates by the end of the month? Are we still living in LaLa land thanks to Central Bank policy?Notes from the Trading Desk - July 8 2019