Trade war-shade war... say the markets, as both the Dow Jones and the S&P 500 posted record highs last week, as well as the best June since 1938 for the Dow, and since 1955 for the S&P. June performance has made up more than half the gains since the start of the year, and the Fed has indicated that it will cut rates this year, giving more impetus to the market’s latest rise.
What’s brought on such good June performance? A lot of reasons, not least the US Federal Reserve’s Federal Open Market Committee statement, which confirmed that the Fed will seek to target 2% inflation and keep labor market numbers high this year. This has led experts to believe that despite the federal funds rate being unchanged, the Fed will probably cut rates to maintain growth despite otherwise negative geopolitical indicators.
What sort of negative geopolitical indicators? Oh, just small things like the on-going US-China trade war, increasing tensions between the United States and Iran, and a spike in oil prices caused by a fire at a Philadelphia oil refinery. And while all that might seem like reasons for the market to fall, investors are riding the buoy of an anticipated Fed interest rate cut to offset the pressures.
So it’ll go up despite the rest? At least for the short-term - it all depends on whether the Fed will bow to market pressure, which it has been trying to combat. US President Donald Trump called for a rate cut, and analysts at Wall Street are all but positive that cuts in early July will happen. The Fed usually doesn’t go against the prevailing market, so if there’s enough expectation of a cut, it will most likely happen. In fact, the expectation of a cut is one of the driving reasons for the good performance of the US equity markets this month.
What We Think: If the Fed does avoid cutting rates once again, then market could reverse into a downwards correction. On the other hand, Trump’s upcoming meeting with Chinese Premier Xi Jinping could end amicably and restore confidence in the markets, giving it a bit of stability. That hope, combined with the expected Fed rate cut, is what’s giving markets their boost right now - but if any of those things turn out poorly or fail to happen, then we’re looking at rocky waters ahead.
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