Last quarter we discussed the typical V-bottom often created when selling is exhausted, fear is elevated and the market begins a fairly quick recovery. By the end of the first quarter, the S&P500 had recovered nearly all off the losses of late 2018. In April the market continued to rise as the Fed reversed course and became more dovish and expectations of a China trade deal were still optimistic. The S&P500 made a new high on May 1st finally eclipsing the previous high set September 21st last year. Without any momentum through the high, it was likely we would see a profit taking pause. Then the weakness accelerated throughout May as talks on trade with China broke down. As fear levels rose, the “flight to quality” was evident as interest rates fell dramatically, the volatility index rose significantly and even gold was being bid up. These were signs the market was again oversold and would turn soon.
In our June 3rd market commentary we wrote, “The market may still have a little more downside, but we view the recent action as longer term opportunity rather than a reason for deeper concern. We expect the current uncertainties to fade over time and expect an oversold bounce soon.” And bounce it did. The market rally continued throughout June and the S&P500 was up about 6.9% for the month. This was the best June performance since 1955 (64 years). The Dow Jones Industrial Average jumped 7.2% posting the best June since 1938 (81 years).
The rally has continued in July as expectations of a Fed interest rate cut are high and odds are currently in favor of more than one rate cut this year. Uncertainty related to China trade has also faded for now as talks have restarted after the G-20 meeting in late June.
The key going forward will be corporate earnings this quarter, corporate earnings guidance looking forward and signs that the worldwide economic slowdown has bottomed. As we are writing this, the S&P500 has traded to a new intraday high and has pierced the 3000 level for the first time. Significant levels like this often create psychological resistance for the market short term, but we remain bullish intermediate to longer term.
A lot has been written about the age of this bull market and the length of the recovery and yes, recessions are a normal part of the economic cycle. That said, market fundamentals remain constructive and point to the potential for further upside. This recovery may be one of the longest if not the longest on record depending on one’s point of view. However, it is different in that it has also been one of the slowest growth recoveries on record as well. Inflation has remained tame, consumer confidence remains high, and we still do not see the valuation excess that could indicate the bear is coming out of hibernation.
Enjoy your summer!
