Stocks surge in June on hopes for a Fed assist

Mike Loewengart, Vice President of Investment Strategy

E*TRADE Capital Management

07/01/19

With the long-running economic expansion showing its age, investors cheered what could turn out to be a well-timed assist from the Federal Reserve. That was the primary market driver last month as stocks posted their best June in more than 80 years—largely on the prospect of monetary easing in the third quarter. Although the Fed hasn’t publicly committed to cutting interest rates, market participants expect the central bank to come off the sidelines soon, which was reason enough to step on the gas in June.

US equities

After selling off in May, equities recouped those losses and then some as the first half of 2019 came to a close. Ironically, economic uncertainty helped fuel the market’s rebound in June. Investors lauded the Federal Reserve’s increasingly dovish response to slowing jobs data and stubbornly low inflation—pushing the S&P 500® Index to a record high.

June 2019 US equity performance

FactSet Research Systems


In keeping with mixed economic signals, sector performance was disjointed during the month. Economically sensitive materials stocks—those that tend to underperform amid softening economic data like we’re seeing—led the market higher, while income-oriented utilities and REITs underperformed even as bond yields fell.

Taking a page from common sense, precious metals spiked in June as gold—which tends to be a haven during periods of uncertainty—climbed to its highest levels since 2013. Through the first half of the year, information technology was the clear sector winner—returning more than 27%.

June 2019 sector performance

FactSet Research Systems


International equities

International stocks were solid performers in June, even amid persistent trade tensions and inflammatory rhetoric between the US and Iran. European equities generated the highest returns, despite manufacturing weakness in Germany, Brexit-related uncertainty in the UK, and challenging budget negotiations in Italy.

Emerging markets also gained ground on expectations for monetary easing in the US. The thinking is that lower rates could pressure the US dollar, providing relief to developing countries struggling to pay off dollar-denominated debt.

June 2019 international equity performance

FactSet Research Systems


Fixed income

Despite the Fed’s decision to hold rates steady, Treasury yields continued to retreat in June. The yield on the 10-year Treasury note briefly fell below 2% for the first time since 2016—a far cry from the 3% that many economists were expecting when the year began. Owing to the inverse relationship between bond prices and yields, lower Treasury yields have generally supported the fixed income markets.

Looking ahead

As the second half of the year unfolds, all eyes will be on the Federal Reserve as it convenes its next policy-making meeting on July 30–31, the results of which could have wide-ranging implications for investors.

•  How low will the Fed go? Although the Fed has only committed to “act as appropriate to sustain the expansion,” investors have done their own translations and believe rate cuts are on the way. So far, Fed funds futures are suggesting a 0.50% cut in short-term interest rates by late September.

•  The search for yield is back: With rates already moving lower, income-focused investors may be on the hunt for yield. While opportunities may exist in income-oriented asset classes like dividend stocks and high-yield bonds, investors should be aware of what they’re getting into and have a clear understanding of their tolerance for risk.

•  Lower rates could cut both ways: A cut in the Fed funds rate could stimulate the economy by spurring increased capital spending and consumer lending activity—aiding any number of economically sensitive industries along the way. However, the Fed only has so much dry powder and acting too early could limit its ability to ward off a recession further down the road—particularly if tariffs and trade wars exact more of a toll than they already have.

With the economy sending mixed signals and monetary easing a real possibility, the second half should hold a lot in store for investors. Although it’s hard to say where we’ll be in another six months, one thing’s for certain: Fed watching is officially back in fashion.

Thanks for reading, and we’ll talk to you again next month.

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Mike Loewengart
Vice President, Investment Strategy, E*TRADE Capital Management, LLC

Mike Loewengart is the Vice President of Investment Strategy for E*TRADE Capital Management, LLC. Mike is responsible for the asset allocation and investment vehicle selections used in E*TRADE’s advisory platforms. Prior to joining E*TRADE in 2007, Mike was the Director of Investment Management for a large multinational asset management company, where he oversaw corporate pension plan assets. Early in his career, Mike was a research analyst focusing on investment manager due diligence for the consulting divisions of several high-profile investment firms. Mike holds series 7, 24, and 66 designations, as well as the Chartered Alternative Investment Analyst (CAIA) designation. He is a graduate of Middlebury College with a degree in economics.

Andrew Cohen, CFA
Director, Investment Strategy, E*TRADE Capital Management, LLC

Andrew Cohen is a Director of Investment Strategy for E*TRADE Capital Management, LLC. Prior to joining E*TRADE, Andrew was the Director of Investments and Operations for a large Registered Investment Advisor, where his responsibilities included investment manager research, asset allocation, and portfolio construction. Previously, he was a Senior Research Analyst and Team Leader for a leading wealth management platform. He is a CFA® charterholder and a member of both the New York Society of Security Analysts and CFA Institute. He is a graduate of Virginia Tech with a BS in finance.

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