Equity markets rallied to all-time highs on incremental dovishness from the Federal Reserve and renewed optimism on a China trade deal. The S&P 500 Index rose for the third-straight week, rising 7% in June and reversing the 7% decline in May. With an 18% jump year-to-date, this is the best start to a year since 1997.
While the Fed kept interest rates unchanged at the June FOMC meeting, there were significant changes to the policy statement, the Summary of Economic Projections (SEPs), and Chairman Powell's press conference – all of which were quite dovish. While a near-term rate cut has yet to be confirmed, there was a definite easing bias in the communication with many Fed officials viewing lower rates as necessary to sustain economic growth in light of risks associated with trade/tariff tensions and slower growth abroad, as well as to boost inflation expectations which remain stubbornly below the Fed’s 2.0 percent goal.
The rising rift between the U.S. and China/Mexico sparked a sharp drop in equity markets across the globe last month. As the trade war escalates and expands, the toll on the U.S. economy – reducing growth and raising inflation – will continue to build. See Nationwide Economics’ take on what's happening and why this month in the economy.
The S&P 500 Index rose for the second-straight week, climbing to within 2% of its all-time high. The next two weeks will place a spotlight on the two primary market drivers: The Fed and trade.
Building fears of a sharp slowdown for the economy are being refuted by solid consumer data. Retail sales rose by 0.5 percent for May, a solid rate that suggests that job gains and accelerating wages continue to drive consumer spending. Moreover, April data – originally reported as falling by 0.2 percent – were revised upward to an increase of 0.3 percent. Core retail sales were up by 0.5 percent for May as well, showing that spending gains were widespread across categories.
The current U.S. economic expansion now rivals the 1990s expansion as the longest in the modern era. But this economic cycle has been notable in that the rate of growth has been the weakest for any expansion going back 70 years.
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