Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
A Bounce/Relief Rally for Stocks
This week we saw an easing in trade tensions and an increase in central bank rate-cut expectations that followed the release of some weaker economic data. These developments helped offset some hawkish chatter from central bank leaders Powell and Draghi and push stocks to their best five–day gain for the year.Trump delayed the application of any new tariffs against Mexico and China (as long as negotiations continue), and job creation reflected in the ADP (27,000) and US non-farm payroll (75,000) reports was much lower than expected for the month of May.
I believe that the jobs reports really set the markets ablaze on the notion that the data was so bad the Fed would now be forced to cut rates. I don’t think it mattered to traders if the weaker data was the result of an intrinsically weaker economy, tariffs, or both; an excuse to rally is an excuse to rally. Stocks added from3.6% to 4.7%, led by the tech and materials sectors. Banks and Dow transports rounded out the list of laggards. Also of note, the VIX (volatility index) actually rose on Friday as stocks jolted higher. Normally it’s the reverse. Since the index seems to be maintaining an upward technical trend, it could be a furthersign that the stock rally will have difficulty developing any meaningful upside momentum – as I discussed last week.
Away from stocks, just about everything reacted positively to the idea of Fed rate cuts – ex the dollar. Treasuries, the metals,and oil showed gains or worked off losses by week’s end. The spread between the 2– and 10-year Treasuries widened to 23bps (from 15 last week), the Bankrate 30–year mortgage yield remained around 4%, and the metals appear to be very close to breaking out. I believe the $1,375 level for gold will prove to be more significant in that regard than $1,350. Other than this, we had the US ISM manufacturing index slip to the lowest level in almost 10 years in May. It fell to 52.1 from 52.8, while the Prices Paid component rose 3.2 points to 53.2. Still, it’s still highly debatable whether or not trade is responsible for all of these aberrations.
It’s likely that stocks will make an attempt to move higher next week, perhaps until all the technical resistance levels have been tested. As I’ve said before, however, debt market dysfunctions may stand in the way of any meaningful upside. One aspect of that is the fact that the Fed’s target rate has already been lower –as far as 0.25%, where the rate stood for nearly seven years. It’s doubtful that returning to that level is going to produce anything but rapidly diminishing returns, economically speaking.
The G20 meeting is scheduled to occur over the weekend, which may bring about some progress regarding trade – but we’ll see.
VP Investment Management