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.
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.
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.
The S&P 500 is 2.5% off an all-time high despite clear slowing trends in the economy as the optimism on a rate cut supersedes the growth outlook. Investors are currently betting on both a positive resolution to the various trade disputes and a cut to the Fed Funds rate.
Investors are beginning to price in a prolonged trade war as the S&P 500 Index has declined for four consecutive weeks. There had been a consensus view that the recent tariff hike was a trade negotiation, and that a deal with China remained within reach. The lack of discussions with Beijing combined with talk of punitive tariffs on Mexico in reaction to the border conflict has shifted consensus.
The impact of heightened U.S.-China trade tensions has been worse in Chinese equity markets, which have dropped 10% since mid-April. The U.S. has pulled multiple levers recently to help limit the damage on the U.S. economy.
