By Mark Knackendoffel on July 26, 2019

The 2nd Quarter was quite volatile for stocks. The S&P 500 rose 3.9% in April, dropped 6.5% in May, and then rose 7% in June, which resulted in a solid total return of 3.8% for the 2nd Quarter. Low inflation, the trade war between China and the U.S. and the Fed’s consideration of lowering short-term interest rates helped moderate investors’ concerns. This also led to a drop in the 10-Year Treasury Rate from 2.4% down to 2.0%.

Latest Economic Reports

Employment: The unemployment rate remained at 3.6% in May. Over the last 12 months, average hourly earnings have also risen 3.1%.

Interest Rates:  As expected, the Fed did not change interest rates following its latest meeting in June. In fact, there is a growing sentiment among the FOMC to lower rates in the near future, as projections show the Fed Funds rate range at between 1.9% and 2.4% by the end of 2019.  It’s currently 2¼% - 2½%.

GDP/Federal Budget: GDP grew 3.1% in the 1st Qtr of 2019; it was 2.2% in the 4th Qtr of 2018. Most of the growth was attributable to business investment, local government spending, and exports. The federal budget deficit was $207B in May after a surplus of $160B in April  and deficit of $146B in May 2018. The Federal budget deficit was $738B YTD versus $532B YTD in 2018.

Inflation: The Consumer Price Index increased 1.8% over the past 12 months, and 2.3% excluding food, energy and trade services.

Imports & Exports: In another sign that inflation pressures are weak, YTD import prices are down 1.5% — the largest Y-T-Y decline since August 2016. Export prices have also fallen 0.7% since May 2018.

International Markets: Escalating tensions between the U.S. and Iran added to the already nervous world economy. In response to another round of tariffs imposed by the U.S., China lowered tariffs on imports it receives from other countries, but raised tariffs on imports received from America.

Eye on the 3rd Quarter

The 3rd Quarter will likely bring much of the same disruption and volatility we faced in the 2nd Qtr.  It is worth noting that the Fed has scaled back its views on economic growth and inflation. In response, short-term interest rates may actually be reduced. In any case, it appears that the trade war with China, along with tensions between the U.S. and Iran, will continue to impact the world economy and the U.S. stock market.