Market Commentary - Week ending June 29th

 Stocks closed lower for the week as the tech-heavy NASDAQ Composite and smaller-cap indexes reversed their prior-week outperformance.

U.S. Markets: The Dow Jones Industrial Average lost 309 points on the week closing at 24,271, a decline of 1.3%.  The NASDAQ Composite retreated -2.4% closing at 7,510.  By market cap, the large cap S&P 500 finished down -1.3%, while the mid cap S&P 400 and small cap Russell 2000 were off -1.9% and ‑2.5%, respectively.

International Markets:  Canada’s TSX retraced all of last week’s gain falling -1%.  Across the Atlantic, the United Kingdom’s FTSE retreated -0.6%, while on Europe’s mainland it was a sea of red.  France’s CAC 40 ended down ‑1.2%, Germany’s DAX was off -2.2%, and Italy’s Milan FTSE finished down -1.2%.  It was a similar story in Asia.  China’s Shanghai Composite fell an additional -1.5%, its’ sixth consecutive down week.  Japan’s Nikkei 225 retreated -0.9%.  As grouped by Morgan Stanley Capital International, developed markets were off -1.2%, while emerging markets finished down -1.3%.

Commodities:  Precious metals, traditionally thought of as a safe-haven in times of market distress, failed to live up to their expectations with Gold falling -1.3% last week closing at $1254.50, while Silver gave up -1.6% ending the week at $16.20.  Energy, as measured by the price of West Texas Intermediate crude oil, surged over 8% last week finishing the week at $74.15 per barrel.  Copper, seen by some analysts as an indicator of world economic health due to its variety of industrial uses, retreated a third week in a row, down -2.0%.

 

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June Summary:  In the U.S., modest gains and losses were the rule for June.  The Dow Jones Industrial Average fell -0.6%, while the NASDAQ Composite was up 0.9%.  The large cap S&P 500 added 0.5%, the mid cap S&P 400 rose 0.3% and the small cap Russell 2000 gained 0.6%.  For the month of June, Canada’s TSX finished up 1.3%.  Outside the U.S., results were almost all negative.  In Europe, the UK’s FTSE was off -0.5%, France’s CAC 40 fell -1.4%, Germany’s DAX lost -2.4%, and Italy’s Milan FTSE fell -0.7%.  In Asia, China’s Shanghai Composite plunged -8% while Japan’s Nikkei was the sole major-market winner, adding 0.5%.  Developed markets finished the month of June down -1.6% while emerging markets were off -4.5%.  Gold provided no safe haven, retreating -3.4% and silver was off -1.5%, but oil added a healthy 12.7%.  Copper finished the month down -4.2%.

Q2 Summary:  Despite June’s lackluster results, the second quarter was positive for most U.S. indices.  The Dow Jones Industrial Average rose 0.7% and the NASDAQ Composite gained 6.3%.  The large cap S&P 500 added 2.9%, the mid cap S&P 400 rose 3.9%, and the small cap Russell 2000 surged 7.4%.  Canada’s TSX rose 5.9%, the UK’s FTSE added 8.2%, France’s CAC 40 rose 3%, Germany’s DAX gained 1.7%, while Italy’s Milan FTSE retreated ‑3.5%.  China’s Shanghai Composite dropped a steep -10.1% while Japan’s Nikkei 225 rose 4%.  Emerging markets overall lost -9.7% while developed markets were off -2.0%.  For the quarter, Gold retreated ‑6.1%, while silver was off just -1.0%.  Oil was the big winner for the quarter, surging 19.5% while copper lost -2.9%.

U.S. Economic News:  The number of applications for new unemployment benefits rose for the first time in a month last week, according to the Labor Department.  Initial jobless claims climbed by 9,000 to 227,000 in the week ended June 23.  The reading exceeded economists’ forecasts of 220,000 new claims.  Despite the slight increase, initial claims remain near their lowest level in almost fifty years.  The more stable monthly average of new claims rose by a lesser 1,000 to 222,000.  Companies continue to report difficulty in finding qualified labor.  Continuing claims, which counts the number of people already receiving unemployment benefits fell by 21,000 to 1.71 million.  That number is reported with a one-week delay.

Overall growth in the U.S. economy remains strong, just not as much as originally reported.  In its latest revision, the Commerce Department reported growth in the first quarter was trimmed to 2% from 2.2%, in large part due to lower spending on health care and a somewhat smaller buildup in inventories.  The softer GDP reading in the first quarter is essentially a moot point now that the U.S. economy roared back in the spring with some estimates predicting it will achieve its fastest quarterly growth in 15 years.  Of note, consumer spending, the trendsetter for the broader economy, was revised down a tick to a gain of 0.9%, while nonprofits spent less on healthcare and households spent less on financial advice and insurance.  Business spending, however, was revised upward as fixed investment rose 7.5% instead of the 7.2% previously reported.  Most other figures in the GDP calculations were little changed.

U.S. inflation has finally hit the Federal Reserve’s 2% target - the first time in six years.  The Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation gauge, rose 0.2%, along with the core rate that strips out the often-volatile food and energy sectors.  TFed Chairman Jerome Powell welcomed the pickup in inflation at his last press conference and said that inflation may rise above the 2% target over the next few months given higher oil prices.  The Fed is picking up the pace of interest-rate hikes – it is now penciling in four increases in total this year, up from the three projected in March.

A measure of nationwide manufacturing activity turned negative in May for the first time since January.  The Chicago Federal Reserve’s index of national activity was reported at -0.15 last month, a significant decline from the upwardly revised 0.42 reading in April.  

The nation’s consumers are still very optimistic about the U.S. economy, but a little less so than they were a month ago.  The Conference Board reported its consumer confidence index slid to 126.4 this month from a revised 128.8 in May.  

Finally:  One measure of the health of the U.S. economy just logged its worst losing streak ever.  The most popular banking sector exchange-traded fund, the Financial Select Sector SPDR ETF (symbol XLF) , marked its 13th consecutive drop—its longest losing streak ever and an indication of the headwinds facing lenders despite a strengthening U.S. economy and the repeal of unfavorable regulations.  The ETF holds shares of some of the biggest banks, household names like J.P. Morgan Chase, Citigroup, and Bank of America.  What’s the problem?  Many believe that it can be traced to the flattening yield curve.  Since banks “borrow short and lend long”, they rely upon a significant difference between short-term interest rates and long-term interest rates for profitability.  The flattening of the yield curve is the enemy of bank profitability – and the enemy is advancing.  The chart below, from the Fed, shows that the 10-year minus 2-year difference is down to just 0.31% - the lowest spread since 2007.

 

Meanwhile our Short-Term Market Indicator remained neutral 

 

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