Data as of June 30, 2019
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Stocks overcame a sharp pullback in May and recorded solid gains in the second quarter. The large‑cap S&P 500 Index reached record highs and ended with its best start to the year in over two decades. Except for energy stocks, all sectors in the S&P 500 recorded gains, led by financials shares, which gained 8% on a total return (including dividends) basis. Materials stocks also performed well, while a rise in Microsoft shares helped drive strong gains in information technology stocks and propelled the company past USD 1 trillion in market capitalization—a threshold previously matched only briefly by Apple and Amazon.com. The quarter was also notable for Uber’s initial public offering, one of the 10 largest in history and the biggest since Chinese internet giant Alibaba Group’s debut in 2014.
Waxing And Waning Trade Hopes Drive Sentiment
The rise, fall, and resurgence of hopes for a resolution to the trade dispute between the U.S. and China seemed to play a large role in driving sentiment during the quarter. In early April, President Donald Trump announced that the U.S. and China were nearing an “epic” trade deal. High‑level talks continued over the next few weeks, and President Trump stated near the end of the month that Chinese President Xi Jinping would soon visit Washington, presumably to sign an agreement.
Hopes for a deal were dashed in early May, however, sending stocks sharply lower. With negotiations at a standstill, on Friday, May 10, the White House increased the tariff rate from 10% to 25% on USD 200 billion in Chinese goods. (The U.S. had previously imposed tariffs at the higher rate on USD 50 billion in Chinese products deemed strategically important.) The S&P 500 experienced its second‑worst day of the year the following Monday, after China’s announcement over the weekend that it was imposing retaliatory tariffs on an additional USD 60 billion in U.S. imports. Companies with significant exposure to China were hit particularly hard, with Apple falling nearly 6% as investors worried both about iPhone sales in China and rising costs for components made in the country.
|Dow Jones Industrial Average||3.21%||15.40%|
|S&P 500 Index||4.30||18.54|
|Nasdaq Composite Index||3.58||20.66|
|S&P MidCap 400 Index||3.05||17.97|
|Russell 2000 Index||2.10||16.98|
Past performance is not a reliable indicator of future performance.
Note: Returns are for the periods ended June 30, 2019. The returns include dividends based on data compiled by T. Rowe Price, except for the Nasdaq Composite, whose return is principal only.
Sources: Standard & Poor’s, LSE Group. See Additional Disclosures.
Further Tariff Hikes Averted, At Least For Now
U.S. trade policy took an unexpected turn on May 30, when the president announced in a tweet that the U.S. would impose a 5% tariff on Mexican goods unless the Mexican government stopped the flow of unauthorized migrants across the border. A later presidential statement added that the tariff would gradually increase to 25% “if the crisis persists.” Stock futures fell sharply in response, with automakers among the worst hit given the importance of cross‑border supply chains in the industry.
Trade tensions eased again in June, supporting sentiment. President Trump announced early in the month that the Mexican tariffs would be suspended following new security pledges from the Mexican government. The president also seemed to give a boost to markets on June 18, when he promised “an extended meeting” with Chinese President Xi Jinping at the G‑20 summit at the end of the month. Investors further welcomed Treasury Secretary Steven Mnuchin’s remark that negotiators were “90% of the way there” in reaching a deal. Markets were closed on the final weekend of the quarter, when President Trump announced that the two sides had resumed negotiations and arranged a truce that would prevent the imposition of new tariffs.
Worsening Economic Signals Raise Hopes For Dovish Fed Turn
While trade signals fluctuated, economic data generally worsened throughout the quarter. In early April, markets surged following reassuring reports on manufacturing activity in both the U.S. and China. Investors also reacted positively to strong jobs and retail sales data. Durable goods orders fell back sharply in the first two months of the quarter, however, and IHS Markit’s composite survey of both U.S. manufacturing and service sector activity in June indicated the weakest growth in overall business activity in three years. May payroll increases fell far short of expectations, and consumers appeared to be growing less optimistic despite healthy wage gains—the Conference Board’s survey of June consumer confidence hit its lowest level in two years due to “a less favorable assessment of business and labor market conditions.”
Expectations that the Fed would respond to the slowdown by cutting interest rates seemed to be the primary factor in June’s market rebound. The S&P 500 Index recorded its second‑best day of the year on June 4, following a pledge from Fed Chair Jerome Powell that policymakers were paying close attention to the impact of trade tensions on the economy and would “act as appropriate to sustain the expansion.” Investors were further encouraged by the Fed’s statement following its June 18–19 policy meeting. Policymakers removed previous references to being “patient” in making policy adjustments, raising hopes that they would act aggressively to counter any downturn.
Trade Progress Is Key For Markets In The Second Half Of The Year
Positive economic growth, low inflation, and accommodative monetary policies are likely to support financial asset prices in the second half of 2019, although much depends on a resolution of the U.S‑China trade dispute. While the consensus earnings forecast is for a reacceleration in corporate earnings growth later in the year, this will depend on improving economic conditions, particularly outside the U.S. However, the global economic outlook remains subdued as most developed economies are growing below their potential and trade tensions are corroding business confidence and capital spending.
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