Stocks retreat from record on mixed news.

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  • S&P 500 pulled back from record high on mixed news.

  • Consumer spending was strong in the second quarter relieving recession fears.

  • Odds of a Fed rate cut are near 100% at the upcoming FOMC meeting.

  • Week Ahead: More economic and earnings reports.UK scheduled to select new Prime Minister.

S&P 500 pulled back from record high on mixed news.

The S&P 500 retreated from the previous week’s record high on mixed news.  On the positive side, consumer spending rose more than expected in June capping a strong second quarter rebound.  Also, the president of the New York Fed, an important Federal Open Market Committee (FOMC) voter, delivered a speech suggesting the Fed needed to act early and aggressively to cut rates if needed when interest rates are at low levels as they are now.  A healthy consumer and a friendly Fed are important supports for the stock market. 

On the other side, President Trump tweeted that trade talks with China, already going on for over a year, could continue for some time.  Many companies have begun shifting supply channels away from China to avoid tariffs, but the changes take time, are disruptive to operations and are potentially more expensive – all of which can hamper profitability.  Also, tensions in the Middle East rose after Iran seized oil tankers in the Strait of Hormuz and the U.S. downed an Iranian drone. 

We believe the markets will remain volatile for the rest of the summer, but that equities can trend higher in the second half of the year.  These positive and negative events are not new and have been on the Via Nova Worry Checklist for 2019 since the beginning of the year.

The S&P 500 lost over 1% for the week led by weakness in communication services, energy and consumer discretionary stocks.  Small caps continued to lag the S&P 500, but international and emerging market stocks showed relative outperformance.  The potential for more aggressive interest rate cuts by the Fed is a positive for emerging markets, since much of their debt is dollar denominated.

Bond yields moved lower and helped lift the Merrill Lynch Broad Bond Market Index by a modest one-third percent.  The yield on the 10-year Treasury dipped to just over 2%, and mortgage rates edged lower, a positive for housing.  Other markets were mixed.  Gold prices rose on heightened Middle East concerns, but oil prices fell on weaker global oil demand forecasts.  The dollar rose amid all the uncertainty because of its status as a safe haven currency in times of increased global concerns.

Consumer spending was strong in the second quarter relieving recession fears.

Consumer spending continued to rebound in the second quarter helping offset weakness in the business sector suggesting that recession risk in the U.S. economy remains low.  Retail sales rose for the fourth consecutive month in June and increased at a robust 7½% annual rate in the second quarter.  Other economic metrics released during the week were also positive, including continued low jobless claims and a rise in the Philadelphia manufacturing survey.  The composition of the Philadelphia survey mimics that of the broader U.S. economy and so is of value in accessing economic momentum.

Odds of a Fed rate cut are near 100% at the upcoming FOMC meeting.

Fed officials have been consistently making the case that an interest rate cut is appropriate given the current low level of inflation and the increased economic and financial crosscurrents from slowing global growth and renewed trade tensions.  This is a dramatic policy shift from the beginning of the year when Fed officials suggested a need for further rate increases.  Markets are now pricing in near 100% odds that the FOMC will cut rates at its next meeting which concludes on July 31.  Via Nova welcomes this more comprehensive view by the Fed and believe it could prompt the rate reductions we believe are needed.

The latest indication came from Federal Reserve Bank of New York President John Williams, who is an influential voter at the FOMC meetings.  He said that in a world where interest rates are lower than they have been historically, central banks must confront any sign of weakness quickly and aggressively.  But with rates already relatively low, the Fed has less space to lower short-term borrowing costs. “When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress,” he said.  Markets initially interpreted his remarks as favoring a large half-point rate cut at the upcoming meeting, but his office later backed away from that interpretation.

Week Ahead: More economic and earnings reports.  UK scheduled to select new Prime Minister.

Second quarter earnings reports have easily beaten lowered expectations so far.  More earnings reports are due out along with a first estimate of second quarter GDP.  Analysts are currently forecasting a 2.1% rate of economic growth in the last quarter, down from 3.1% in the first quarter.

In the international arena, the UK is scheduled to vote on a new Prime Minister to replace Theresa May.Iran and the Middle East will also be a key focal point.