After a relatively tough month in May, with the S&P 500 index down about 6.5%, we’ve had a dramatic reversal in June, gaining about 5% as of June 13th. As always, there’s no shortage of headlines, with oil tankers, China trade, and Tweets being the popular ones right now.
Interestingly, the market has shrugged off the oil tanker explosions, for the most part. This is probably due simply to supply and demand. With shale production being so prevalent, supply is not an issue. With predictions of slowing global growth (and, in fact, some evidence of slowing growth), demand is less of an issue. As with about any commodity, if you have more supply and less demand, prices will likely fall or stay low, which is why I believe oil prices are where they are.
With respect to China, I’m more and more convinced that tariffs penalize American consumers as well as foreign producers, resulting in the rare “lose-lose” situation. Perhaps there is a certain amount of tolerance by Americans (or elasticity, maybe) for paying higher prices, as it could be viewed as righting the perceived wrongs of trade imbalances. And perhaps this will be a means of convincing Americans that we may not need as much disposable imported “stuff,” and that we should be careful with our consumption, particularly since it could cost more. Those aren’t necessarily favorable economic outcomes, but the may be the medicine we need to cure the more long-term issues. At any rate, tariffs will likely have the effect of increasing prices for “stuff” we buy, possibly causing inflation and reducing corporate sales, both of which could stall the economy. We’ll see.
My most recent indicators reflect that after the rebound, the market is likely a bit overpriced. Fundamentally, we’re pretty close to fairly valued. I am concerned that GDP growth expectations are being reduced. But jobless claims remain healthy and the Fed’s recession predictors remain split. However, we are still in the weakest season of the year (historically), transportation indicators are weak, the Dollar is strong, and short-term valuation indicators have risen. Those factors lead me to believe that while the fundamentals might be showing the S&P 500 to be correctly valued, the underlying technicals of the markets lead me to believe that we’ll see a pullback sometime this summer. As I stated in last month’s update, the S&P 500 could finish the year about where it is now, but we may see peaks and valleys along the way, as buyers and sellers move from one sector to another.
We closed out our trade on intermediate-term Treasury bonds this week, having made a nice return on bonds. We moved to shorter-term Treasuries, thinking that long-term yields may be done contracting, but that short-term ones could still move lower, especially if the Fed cuts rates. I’ve spent a good bit of this week taking profits in stocks, too, so many of my custom discretionary portfolios have more cash than usual right now. I hope to put that back to work soon. I don’t think the bull market is over, but I do think stock selection and prudent profit taking could add some value.
We’ll continue to monitor the stock market and the economy, so feel free to enjoy your summer! I hope you have fun travel plans. We’ll be closing early on July 3 and all of July 4, but after that, the next stock market holiday is Labor Day. If you do have any questions, please call us so that we can review your positioning. Also, I strongly encourage you to complete or update your Signature Life Plan. We’ll be able to verify that YOUR specific plan on target, which is far more important than whether or not the S&P 500 moves up or down.
As always, these recommendations are mine, and may or may not be the same as those of Raymond James. This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made.
Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities.