June Dow - Best Since 1938

June Dow - Amazing First Half Ends On A High Note

June Dow is the best since 1938. Also, the best first half we've seen in many years ended on a high note. S&P 500 increased 0.58%, Nasdaq increased 0.48%. And Russell 2000 increased 1.29% on Friday.

As you can see from the chart below, the Dow was up 7.2% in June making it the best June for the Dow since 1938. Caterpillar, Apple, and Goldman Sachs drove the Dow’s gains in June. They all increased at least 12%.

Goldman Sachs increased 2.65% on Friday on the news of its raised buyback and dividend discussed in a previous article.

June Dow - S&P 500 had its best first half gain since 1997 as it increased 17.3%.

June Dow - All 11 sectors increased. Tech was the best as it increased 26% despite fears about the trade war. Worst sector was energy which increased 7.1%. That would be the best performance in some years. It’s interesting that energy underperformed because oil was up 27.05%. It was up 9.3% in June.

Chip stocks, which are the most vulnerable to a trade war and cyclical slowdown increased over 12% in June. That’s the biggest one month gain since September 2010. The sector fell 15.5% in May.

For the market overall, June was the opposite of May as the S&P 500 fell 6.58% in May and increased 6.89% in June.

As you can see from the chart below, gold prices were up 7.8% in June as the dollar fell and the Fed guided for future rate hikes. This was the biggest monthly gain since June 2016.

June Dow - Solid Friday

S&P 500 had a big rally in the last half hour on Friday as it closed at the high of the day. It’s less than 13 points from its record high. On the other hand, it’s only about 11 points from its high in January 2018.

There have been virtually no gains in 18 months, but amazing gains in the past 6 months. VIX fell 4.68% to 15.08. It’s still much higher than it was in 2017 when stocks rallied without any volatility.

CNN fear and greed index only increased 3 points to 50 which is perfectly neutral. Most investor sentiment polls from the week where the market hit its record high still show there isn’t any euphoria.

Investors are neutral as they await the results of the trade negotiations. Every sector rallied on Friday. Best 2 sectors were the financials and energy which increased 1.4% and 1.19%. Big banks raised their dividends and buybacks after passing the Fed’s stress test.

The yield curve flattened slightly

June Dow - 10 year bond yield fell 1 basis point to 2.01%. 2 year yield increased 1 basis point to 1.75%. Some think the inversion moment happened. That means a sharp steepening signals a recession.

In this case, staying near the flatline is a good thing. A 26 basis point differential between the 10 year and the 2 year is very flat.

2 year yield can increase slightly if the Fed doesn’t plan on raising rates by 50 basis in July like Bullard mentioned. There is a 28.1% chance of 2 cuts and a 100% chance of at least 1 cut.

Normally, a 100% chance of a cut 32 days before a Fed meeting is enough to think one is guaranteed. But the situation is fluid with the G20 summit underway. Odds of at least 3 cuts this year are 59.7%. With only one cut in July, 3 cuts would be difficult to get done.

Disastrous Chicago Fed PMI

June Dow - June Chicago Fed PMI was a complete disaster as it fell from 54.2 to 49.7 which missed estimates for 53.6 and the low end of the estimate range which was 52. This was the first reading below 50 since January 2017.

As you can see from the chart below, it’s weaker than the sum of the regional Fed indexes. The stock market will probably fall on Monday if the ISM manufacturing PMI falls below 50.

There’s probably almost a 50% chance of it falling below 50. I expect it to be between 49 and 51.5.  

In Q2, the Chicago Fed business confidence index averaged 52.2 which is a 13% sequential decline and a 16% yearly decline. Production index fell 15.5% sequentially to the lowest level in 3 years.

Employment indicator averaged 50.8 in Q2 which was the lowest level since Q4 2016. According to the special question in this report, 80% of firms said that they were negatively impacted by government imposed tariffs, with tariffs raising prices of their goods leading to a pullback in orders.

June Dow - Latest Q2 GDP Estimates

Final Q1 GDP growth report is in. Growth stayed at 3.1% and real consumer spending growth fell from 1.3% to just 0.9%. Now everyone’s attention will shift to the preliminary Q2 GDP report which will be released on July 26th. I’m expecting growth to be in the high 1% range.

Atlanta Fed GDP Nowcast lowered its estimate from 1.9% to 1.5%. This was due to the PCE report, the GDP report, and the detail tables of the national income and product accounts.

Estimate for real personal consumption expenditures growth fell from 3.9% to 3.7%. I’m confident consumption growth will be higher than it was in Q1. The estimate for real gross private domestic investment growth fell from -3.8% to -4.9%. Estimate from the St. Louis Fed Nowcast is 3.09%.

This week the estimate from the NY Fed Nowcast fell 9 basis points to 1.3%.

June Dow - Durable goods orders and the new single family home sales reports were the biggest drags on the growth estimate. Q3 Nowcast also fell 9 basis points. It’s now at 1.2%.

While I have expected Q2 and Q3 growth to be weak for 6 months now, it’d still be terrible to see back to back readings of below 1.5% growth. That’s closer to a recession than many bulls would like.

Finally, the ECRI leading index’s growth rate fell from -2.3% to -2.4%, signaling weakness in the first half of 2020.

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