Stocks finished the week higher, with the S&P 500 rallying 4.4%, the best weekly gain in six months. At the same time bond yields declined to the lowest levels in two years. Increased expectations of a Fed rate cut, hopes that the U.S. and Mexico can reach a deal to avoid tariffs, and improved valuations, all helped stocks move higher. Economic data were mixed, as strength from the services sector was offset by weakness in the manufacturing sector. Job gains for the month of May came in below expectations, but the unemployment rate held steady at a 50-year low. At this stage of the economic cycle we expect a more balanced mix of positive and negative surprises. However, we continue to believe that resilient economic growth, rising corporate profits, and low interest rates provide a positive fundamental backdrop, modestly outweighing current risks.
Is the Market Teetering?
Depending on where you're from, you likely know the old playground favorite as a teeter-totter or a seesaw. Regardless of what you call it, as children we all enjoyed them just the same. Pair up with someone of your similar size and weight and the ride was eventful and full of reciprocal ups and downs. But when the person on one end far outweighed the other, the ride was one-sided.
The market seesaw has experienced both in recent years. From 2013-2015, extraordinary Fed stimulus and falling unemployment provided the weight that persistently held the market up, tipping the scales to a 53% gain over that period. And in 2017, it was the prospect of tax cuts and building economic momentum that supplied the heft to lift the stock market 22% with essentially no teeter to the totter (the year's largest pullback was just 2.8%).
Current conditions have shifted, with much more balance on each side of the market board, as sound fundamental data and increasing policy/trade risks have taken turns bearing the weight of the market's attention. The result has been much more frequent and sizable ups and downs. Stocks fell 19% late last year, followed by a 23% rise through April and tipped down 6% in May1. Based on our assessment, moderate U.S. economic growth, healthy corporate profits, and still-helpful Fed policy are enough to tip the balance in a positive direction more broadly. But trade disruptions and a decelerating global economy are gaining weight. The balance will likely keep the market seesaw in motion as we advance this summer. Here's a look at the key matchups:
Sources: 1. Bloomberg, S&P 500 price returns, 2. Bloomberg, 3. Morningstar Direct, stock returns measured by the S&P 500, bonds returns measured by the Bloomberg Barclays U.S. aggregate bond index. 4. Bloomberg, S&P 500 annualized total return (including dividends).
|Dow Jones Industrial Average||25,984||4.7%||11.4%|
|S&P 500 Index||2,873||4.4%||14.6%|
|10-yr Treasury Yield||2.08%||-0.04%||-0.60%|
Source: Bloomberg, 06/07/19. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.
The Week Ahead
The Weekly Market Update is published every Friday, after U.S. markets close.
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