U.S. Stock Market
Stocks recorded modest gains in July, helping lift the large‑cap benchmarks and the technology‑heavy Nasdaq Composite Index to new highs. Trading volumes were generally light, and volatility was also subdued—the S&P 500 Index recorded only one daily move over 1%, falling 1.09% on the last day of the month. Within the S&P 500 Index, communication services performed best, helped by strong gains in Alphabet (parent of Google) and Twitter following earnings releases. Technology shares were also strong, lifted by gains in semiconductor stocks. Energy shares recorded losses, pressured by a drop in oil prices. Health care stocks were dragged lower in part by a drop in Johnson & Johnson shares following reports of a criminal probe into whether the company lied about the possible cancer risks of its talcum powder.
Resumption of Trade Talks Boosts Sentiment Early in Month
Trade tensions, the faltering global economy, and hopes for a strongly dovish turn in monetary policy continued to dominate investor sentiment in July. The announcement of a truce in the U.S.‑China trade war at the G‑20 summit at the end of June helped stocks begin the month on a strong note. Both sides agreed to hold off on further tariff increases, and the White House eased a ban on sales to Chinese telecommunications giant Huawei Technologies, giving a particular boost to semiconductor stocks. According to the White House, China also pledged to buy more U.S. agricultural goods, although Chinese officials reportedly disputed the claim. Sentiment also seemed to get a lift later in the month, as Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer prepared to fly to Shanghai to resume negotiations.
Hopes for a deal faded significantly on the final two days of the month, however. An increase in the purchase of U.S. farm exports by the Chinese failed to materialize, angering the White House, and on July 30, President Donald Trump told reporters that “the biggest problem to a trade deal is China would love to wait” until he is replaced in 2020 (which he vowed is not going to happen). President Trump followed up the next day with additional criticism of China on Twitter, setting the stage for his announcement on August 1 of a new 10% tariff on the USD 300 billion of Chinese imports that had previously escaped duties.
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Past performance is not a reliable indicator of future performance.
Note: Returns are for the periods ended July 31, 2019. The returns include dividends based on data supplied by third‑party provider RIMES and compiled by T. Rowe Price, except for the Nasdaq Composite Index, whose return is principal only.
Sources: Standard & Poor’s, LSE Group. See Additional Disclosures.
Slowing Global Growth Leads to Fed Rate Cut—But Not the Aggressive Action Some Had Anticipated
Further evidence emerged in July that China and other areas of the global economy—particularly export‑oriented economies in Europe—were coming under pressure from the trade war. On July 10, Federal Reserve (Fed) Chair Jerome Powell told the House Financial Services Committee that “uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.” Stocks rose on the release of his testimony, which seemed to promise aggressive Fed action to counteract the downturn. Such hopes rose further on July 18, after Federal Reserve Bank of New York President John Williams said in a speech that “it pays to act quickly to lower rates at the first sign of economic distress.” Futures markets immediately priced a high (71%) likelihood of a 50‑basis‑point (0.50%) rate cut at the Fed’s July 30–31 policy meeting. A New York Fed spokesperson soon clarified that Williams was not promising a specific action at the upcoming meeting, however, and investors returned to anticipating a quarter‑point cut.
On July 31, as expected, the Fed announced a quarter‑point reduction in the federal funds rate—its first cut in a decade—along with an early end to its program of shrinking its balance sheet. In his post‑meeting press conference, however, Chair Powell seemed to take markets by surprise by referring to the cut as a “midcycle adjustment.” The term seemed to imply to some investors that the Fed was not entering an easing cycle with more cuts ahead, and shares fell sharply to close out the month.
U.S. Economy Remains a Positive Outlier, Favoring Domestically Oriented Firms
Indeed, much of July’s domestic economic data were encouraging, suggesting that the Fed might not have to ease aggressively in the coming months. June payroll growth came in well above expectations, and the Conference Board’s consumer confidence index rebounded much more than expected. Retail sales recorded a second month of solid gains in June, and durable goods orders (outside the volatile transportation sector) also beat expectations. On the downside, factory activity remained subdued, and the housing sector also proved something of a weak spot, with existing home sales falling and new construction data sending mixed signals.
The contrast between domestic and global economic conditions was reflected in the second‑quarter earnings reports released during the month. According to FactSet, S&P 500 companies that get more than half of their revenues from overseas were on track (as of July 26) to suffer a year‑on‑year earnings decline of 13.6%, while domestically focused firms were set to report an increase of 3.2%. Overall, both FactSet and Thomson Reuters ended July expecting earnings growth to be roughly flat in the second quarter following 2018’s surge, although more companies than usual had been beating expectations.
Trade Tensions May Undermine an Earnings Rebound
Generally, T. Rowe Price managers remain cautiously positive about global economies and financial markets, although the recent escalation in trade tensions has triggered renewed volatility and could further impede growth. The consensus earnings forecast is for a reacceleration of earnings growth later in the year, which will depend on improving global growth, particularly outside the U.S. However, the global economic outlook remains subdued, and earnings momentum has turned negative in both Europe and Japan. While the direct impact of tariffs on earnings currently appears manageable, the secondary effects on business confidence, capital spending, and hiring could diminish hopes for a second‑half earnings rebound.
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