Expectations of lower rates lift stocks.

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  • S&P 500 hits another record closing above 3,000.

  • Fed Chairman Powell suggested a rate cut is coming at the next FOMC meeting.

  • Week Ahead: Q2 earnings season begins plus updates on retail sales and industrial output.

S&P 500 hits another record closing above 3,000.

The S&P 500 rose above the psychologically significant 3,000 mark to another record high in the latest week after Fed Chairman Powell offered strong hints in Congressional testimony that the Federal Open Market Committee (FOMC) will cut rates at its next meeting scheduled the end of this month.  Lower short-term interest rates reduce borrowing costs providing a boost to economic activity.  The shift by the Fed toward a more accommodative interest rate policy should help check off one of the top items on the Via Nova Worry Checklist for 2019.  Other worries remain, however, including trade negotiations with China, the recent slowdown in economic momentum and modest corporate earnings growth.

The S&P 500 rose just under 1% for the week led by consumer discretionary and energy stocks.  However, stocks outside the domestic large cap space did not fare as well.  Small caps fell as did international and emerging market stocks, raising some concern that the overall market may be struggling in an environment of slowing global growth.

Interestingly, the talk of lower short-term rates by Chairman Powell put some upward pressure on long term rates causing a modest decline in the Merrill Lynch Broad Bond Market Index for the week.  The yield on the 10-year Treasury rose one tenth of a percent to 2.1% but is still well below the 2.7% level at the beginning of the year.  30-year mortgage rates remain close to 4% supporting the housing market.    Other markets were generally positive.  Treasury Inflation-Protected Securities (TIPS) and gold all rose, though Real Estate Investment Trusts (REITS) lost some ground due to the bump up in long term rates.  The value of the dollar fell on expectations of a drop in U.S. interest rates which tends to benefit exporting companies.

Fed Chairman Powell suggested a rate cut is coming at the next FOMC meeting.

Twice a year, the Chairman of the Federal Reserve reports to the House and the Senate on the state of the economy and monetary policy.  This week, Powell suggested that slower growth, renewed international crosscurrents such as trade frictions amid continued low inflation strengthen the case for lower rates.  In January, Powell reported the FOMC shifted from an intention to raise rates to being “patient.”  This week’s testimony was a further shift toward accommodation.  Via Nova agrees that lower short-term rates are warranted and believe we could see two or three cuts in the second half of the year. 

Week Ahead: Q2 earnings season begins plus updates on retail sales and industrial output.

This week, the second quarter earnings season kicks in gear, and forecasts currently call for flat to slightly lower profits compared to a year ago, though companies usually report stronger than expected earnings.  Investors will be listening to management guidance related to the timing of a future reacceleration in profits growth.  We will be watching for comments as to how management is coping with the trade war with China.  Many are shifting supply chains away from China to avoid tariffs.

Along with earnings, we will get an update on retail sales and home building.Consumer fundamentals remain healthy, so spending could remain firm.The housing market has benefited from the recent decline in mortgage rates.