The Markets in July

The Markets in July

Stocks ran hot and cold in July, influenced by worsening global economic conditions, ongoing trade negotiations with China, and softening domestic business investment. While the Fed’s decision to reduce short-term interest rates was not unexpected, stocks reeled at month’s end. Some analysts questioned the timing of the interest rate reduction, particularly in the event of an economic downturn in the future. Corporate earnings reports in July were generally positive, which drove stock prices higher. Low domestic unemployment, increased consumer spending, and moderate wage increases helped insulate investors from an otherwise global economic downturn.

Only the Global Dow in July was unable to surpass its June closing value. Otherwise, each of the major benchmark indexes listed posted monthly gains, led by the Nasdaq and the S&P 500. Year-to-date, the tech stocks of the Nasdaq led the way, climbing 23% above their 2018 closing mark. All of the benchmark indexes were well above their end-of-year values. Although long-term bond yields inched up in July, for the year, yields were down and bond prices high.

The price of crude oil ended the month at $57.88 per barrel, down from the end-June price of $58.16. The national average retail regular gasoline price was $2.72 per gallon on July 29, up from prior month’s $2.65 but $0.13 less than a year before. The price of gold rose by the end of July, climbing to $1,426.10, up from $1,413.30 at the end of June.

Latest Economic Reports

  • Employment: Total employment increased by 224,000 in June after adding only 72,000 (revised) new jobs in May. The average monthly job gain so far in 2019 was 172,000 per month (223,000 in 2018). Notable employment increases for June occurred in professional and business services (51,000), healthcare (35,000), and transportation and warehousing (24,000). The unemployment rate nudged up by 0.1 percentage point to 3.7% in June. The number of unemployed persons increased slightly to 6.0 million in June (5.9 million in May). The labor participation rate was 62.9% and the employment-population ratio was 60.6% in June. Over the last 12 months ended in June, average hourly earnings have risen 3.1%.
  • FOMC/interest rates: As expected, the Federal Open Market Committee lowered interest rates by 25 basis points in July. Lack of price inflation and slowing global economic growth underscored the Committee’s decision to reduce the target range for the federal funds rate to 2.00%-2.25%. The vote to reduce rates was 8-2; dissenting members suggested keeping rates unchanged.
  • GDP/budget: Economic growth appears to have slowed in Q2, according to the advance estimate of GDP. The quarter grew at an annualized rate of 2.1%. Q1 saw an annualized growth of 3.1%. Consumer prices and spending increased in Q2, rising 2.3% and 4.3%, respectively. Pulling the GDP down were lowered fixed business investments (equipment, software, structures, etc.) and exports. The federal budget deficit for the first nine months of the fiscal year was $747.1 billion. Over the same period for fiscal year 2018, the deficit was $607.1 billion.
  • Inflation/consumer spending: Inflationary pressures remained weak as consumer prices rose 0.1% in June and were up 1.4% over the 12 months ended in June. Consumer prices excluding food and energy increased 0.2% in June and 1.4% since June 2018. In June, consumer spending rose 0.3% (0.5% in May). Personal income and disposable (after-tax) personal income climbed 0.4% in June, respectively. The Consumer Price Index increased 0.1% in June, the same increase as in May after rising 0.3% in April and 0.4% in March. Over the 12 months ended in June, the CPI rose 1.6%. Energy prices held overall consumer prices in check, falling 2.3% in June. Prices less food and energy rose 0.3% in June — the largest monthly increase since January 2018. Core prices (less food and energy) are up 2.1% over the last 12 months. In contrast, over the same period, the energy index has fallen 3.4%. According to the Producer Price Index, the prices that companies received for goods and services rose 0.1% in June after increasing 0.1% in May and 0.2% in April. The index increased 1.7% for the 12 months ended in June. Prices for services increased 0.4%, offset by a 0.4% drop in prices for goods. The index minus foods, energy, and trade services was unchanged in June after moving up 0.4% in May, and has increased 2.3% over the last 12 months.
  • Housing: Activity in the housing market can be described as erratic. Existing home sales fell 1.7% in June after climbing 2.5% in May. Year-over-year, existing home sales are down 2.2%. Existing home prices continue to rise, as the June median price for existing homes was $285,700 — an all-time high. Existing home prices were up 4.3% from June 2018. Total housing inventory for existing homes for sale in June increased to 1.93 million (1.91 million in May), representing a 4.4-month supply at the current sales pace. Sales of new single-family houses rebounded in June, surging a robust 7.0% over May’s revised total. Sales in May fell a whopping 8.2%. New home sales are now 4.5% ahead of their June 2018 estimate. The median sales price of new houses sold in June was $310,400 ($303,500 in May). The average sales price was $368,600 ($371,200 in May). Inventory at the end of June was at a supply of 6.3 months (6.7 months in May).
  • Manufacturing: According to the Federal Reserve, industrial production was unchanged in June after increasing 0.4% in May. For Q2 as a whole, industrial production declined at an annual rate of 1.2%, its second consecutive quarterly decrease. In June, a nearly 3.0% increase in motor vehicles and parts contributed significantly to the 0.4% gain in manufacturing output. Utilities fell 3.6% as milder-than-usual temperatures in June reduced the demand for air conditioning. Total industrial production was 1.3% higher in June than a year earlier. After falling 1.3% in May, durable goods orders jumped 2.0% in June. New orders for capital goods used by businesses to produce consumer goods rose 1.4% in June after plummeting 6.5% the prior month. Core capital goods (excluding defense and aircraft) increased 1.9% last month.
  • Imports and exports: Another sign that global inflationary pressures continued to be weak: import prices fell 0.9% in June after recording no change in May. This is the first monthly decline since a 1.4% decline in December 2018. Import prices decreased 2.0% over the past 12 months — the largest year-over-year decline since import prices fell 2.2% for the 12-month period ended in August 2016. Import fuel prices declined 6.5% in June following a 2.3% advance the previous month. The June downturn was the first monthly decline in import fuel prices since a 13.3% drop in December 2018. Excluding fuel, import prices fell 0.3% for the second consecutive month in June. Export prices fell 0.7% in June after decreasing 0.2% in May. The June decrease was the largest monthly drop since export prices declined 0.8% last November. Export prices decreased 1.6% for the year ended in June, the largest 12-month decline since prices plummeted 2.4% for the year ended in August 2016. The latest information on international trade in goods and services, out July 3, is for May and shows that the goods and services deficit was $50.5 billion, down from the $51.92 billion deficit in April. May exports were $210.6 billion, $4.2 billion higher than April exports. May imports were $266.2 billion, $8.5 billion more than April imports. Year-to-date, the goods and services deficit increased $15.7 billion, or 6.4%. Exports increased $5.1 billion, or 0.5%. Imports increased $20.8 billion, or 1.6%. The advance report on international trade in goods (excluding services) revealed the trade deficit to be $74.2 billion in June, down $0.9 billion from May’s deficit. Goods exports in June were $3.7 billion less than the prior month, while imports of goods were $4.6 billion less than May’s imports.
  • International markets: Boris Johnson of the Conservative Party became Britain’s new prime minister, vowing to lead the country out of the European Union even with no Brexit plan in place. Meanwhile, the European Central Bank indicated it would cut short-term interest rates and restart a program of buying bonds amid a worsening European economy. In Japan, consumer prices stagnated in June and have risen a scant 0.7% since June 2018 — yet another sign of tepid global inflationary pressures. China’s GDP advanced at an annualized rate of 1.6% for Q2 and at a 6.2% year-over-year rate. That growth came despite the trade impasse with the United States.
  • Consumer confidence: After showing signs of concern in June, the Conference Board Consumer Confidence Index® rebounded in July, up to 135.7 from June’s 124.3. The Present Situation Index — based on consumers’ assessment of current business and labor market conditions — increased from 164.3 to 170.9. The Expectations Index — based on consumers’ short-term outlook for income, business, and labor market conditions — increased from 97.6 in June to 112.2 in July.

An Eye on the Month Ahead

Corporate earnings reports in August, coupled with the ongoing trade negotiations between the U.S. and China, are likely to impact stock values. Interest rates will remain steady until at least September, when the Federal Open Market Committee next meets.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indices listed are unmanaged and are not available for direct investment.

 

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