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With half of 2019 now in the books, it is time to evaluate the success that the market has experienced over the past six months. I'll be honest...I didn't see this coming. Don't get me wrong, a positive market wasn't totally unexpected...coming off of the worst quarter in a decade some recovery was predictable. But double digit growth almost across the board? That is more growth than even the most aggressive prognosticators suggested.
So what gave the market so much fuel? The answer is a reversing course on much of what had sent the market reeling at the end of 2018. After several interest rate rises last year, it appears that President Trump's constant drumbeat of wanting the Federal Reserve to lower rates is finally making an impact. The President has long been a proponent of keeping rates low. The theory is simple. When interest rates are low, it boosts corporate expansion because companies can finance said expansion with low interest loans. Corporate expansion means more opportunity for profit...which is good for the market.
The question here is whether or not the market NEEDS this infusion of cheap cash. In relative terms, rates are still pretty low. Not to mention, we are most certainly not in the expansion phase of the business cycle. Corporate profits are high, unemployment is low, giving rate decreases the potential to unnaturally inflate the stock market. This could become a problem when a recession actually hits our economy and the Fed has fewer moves in its arsenal to alleviate pain.
Then there is China, where we are still very much in "wait and see" mode. At the recent G20 meeting, there was a truce between President Trump and Chinese President Xi Jinping that will put a halt on new competing tariffs, which sent the S&P to an all time high. Lack of escalation is certainly good, but whether or not there is real progress down the road remains to be seen. While the market reacted joyfully to the news of this cooling off period, some sectors seem to be feeling the pessimism again, as metals like copper and nickel fell for the third consecutive month.
As we head into the second half of the year it is hard to know what to expect. History tells us that when the market goes up in the first half of the year, it continues upward momentum 75% of the time. Of course, you need only look to last year to find a year when history did not repeat.
The only thing that is safe to predict is continued surprises. The market could continue to soar but fears of global economic slowdown, the inverting long-term yield curve, and the potential for the Fed and/or China to react in ways the market has not predicted should add at least some level of doubt to our collective optimism.
Onward and (hopefully) upward, we go.