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LHT Consultants

241 Kings Highway East , First Floor

Haddonfield, NJ 08033

kevinroche@lhtconsultants.com

609 • 314 • 0397

Summer Doldrums? June would make you think otherwise

July 3, 2019

There is a very popular on Wall Street that has been around for over a century:  “Sell in May, go away.”  To many, this has been a tried and true measure; it is even been a lesson bestowed upon readers in the book Reminiscences of a Stock Operator.  While this adage made sense to traders at the time, their reasoning was entirely different from today’s climate.  Lower volumes and less liquidity impacted one’s ability to buy and sell during those months as many traders vacationed or were “on holiday” (as so many like to sound pretentious) during the summer; and ultimately one’s performance was enhanced by the action of selling in May and coming back later in the year.  Man, were these guys wrong! 

 

While May was a month that gave back almost all the gains it made during the first quarter of 2019, June was the month that made it all back (and more so).  Almost all of the risks that caused a flight to quality earlier in the quarter had positive outcomes in June that benefited the markets.  Here are a couple of the items that pushed the markets to one of the best monthly performances for the markets:

 

Tariffs

During May and June, the United States challenged Mexico and China to come up with solutions regarding illegal migration and protected intellectual property (respectively).  China was threatened with a 25% tariff on $200 billion of goods as well as blocking sales to Huawei.  Mexico was threatened with tariffs as well; but at the end of May, Mexico’s president agreed to be more responsive to the issue of migration.

 

China also reached an agreement with the U.S. (in June) that they would continue to have discussions and both parties agreed not to impose additional penalties on one another.  This last minute event helped the market for the end of the quarter and gave it continued momentum for the beginning of the third quarter as well. 

 

Rates

During June, Fed Chairman Powell was in the spotlight.  During its June meeting, the Fed decided to keep its key rate unchanged between 2.25 percent and 2.5 percent.  The Fed also issued a statement that it would be prepared to cut rates in an effort to continue expansion of the U.S. economy.  Uncertainties in the economy—as a result of the tariffs and other politically influenced activities—have become significant threats to the United States’ economy and as such, the Fed removed the word “patient” from its language about adjusting rates. 

 

The resolution of these events, for the time being, sent the markets higher for June and the Standard and Poor’s index was up 6.89% (after being down 6.58% in May).  July continued June’s rally as investors believe the Fed will cut rates at some point this year and it could happen as early as September.

 

Globally, the investors are continuing to seek out stability for their economies and ultimately their markets.  Europe’s head of the ECB, Mario Draghi, stated it is ready to provide additional stimulus including rate cuts if the eurozone economy does not strengthen.  Asia remains on alert as it tries to get a clearer picture of what will happen to many large companies if these tariffs do go into effect.   

 

As exhibited in the chart below, May was in a “risk off” environment in May where equities fell and bonds outperformed stocks.  Many investors sought safe haven in bonds and the 10-year Treasury yield fell 38 basis points to 2.1%; this 38 basis point fall represents a 15% move and the yield curve inverted (which means less yield for longer-dated bonds).  But in June, the markets recovered all it lost in May, with some confusion.  The 10-year Treasury yield remained at 2% in June and at a few times late in the second quarter, the yield fell below 2%. 

 

Election

Regarding the election, well, there is nothing dull about this!  The election is still almost 16 months away and it will be hotly contested on both sides of the aisle. Traditionally, GDP growth is a key variable as to whether voters will reelect a sitting president.  But with low approval ratings and growing concern over the President’s policies, it is difficult to say if Trump will be reelected.  Whoever comes to office will face a slowing economy and a heavy task of re-establishing trust in the United States both domestically and abroad. 

 

 

 

All asset classes were positive for the month of June, with domestic Small and Large Caps doing the best. Breaking this down even more, Small Cap Growth was the best performing asset class (as exhibited by the Russell 2000 Growth), followed by the Nasdaq and its technology stock constituents.  Fixed Income and High Yield were up 1.68% and 2.54%, respectively, and even International (as exhibited by the MSCI EAFE) recovered from its pullback in May. 

 

Going forward, investors will be considering a variety of risks that could impact the economy and markets in general.  These range from the inverted yield curve to the 2020 Presidential election.  Regarding yields, the inverted curve (and the subsequent 10-year rate under 2%) is an indicator for many things, including a possible recession.  However, this indicator really takes more time to develop and could be more influenced by the expectation of rate cuts as well as global investors seeking out yield instruments that actually pay a coupon.  LHT remains aware of the shape of the curve, but believes the historical significance is somewhat muted in this current environment. 

With the recovery in the markets and returns in the high teens in domestic equities, it is difficult to promote reducing exposure from Equities.  But, with the decrease in yields and expectation of the Fed reducing rates, it does make sense to have exposure to Fixed Income.  As a point of reference, the 30-year Treasury yield has tightened 14% in the first half of the year from 2.95% to 2.53%.  How this translates to overall performance is that buyers are willing to pay a premium for the bond (in excess of par value) and will be more likely to buy today’s bonds at an even higher level if the Fed reduces rates.    

 

 

Over the last twelve months the market has been extremely resilient in these late stages of the economic cycle, if not reaching new highs in the early parts of the third quarter this year.  However, political risk as well as fears of a slowing economy have begun to give investors pause as they await confirmation of stimulus to keep the markets moving higher.  Fixed Income continue to be an unsung hero but should be a part of one’s asset allocation.  It used to be that investors would sell in May and go away.  However, with all that is going on in the domestic and international markets, it is hard not to keep one eye on the news.  One thing is for sure, you don’t have to worry about being bored this summer! 

 

Be sure to consult your financial advisor with any questions regarding the markets and investments.  For more information about LHT Consultants as well as to receive more updates on the markets, please visit us at www.lhtconsultants.com. 

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