During this Independence Week it appears markets and the economy took the “liberty” of achieving new records. The major stock market indexes all closed at record highs with the Dow Jones Industrial Average at 26,966, the S&P 500 at 2,996, and the Nasdaq Composite at 8, 170. There were no clear fundamental reasons for the rise. It’s most likely a result of the President’s comments that trade talks with China will resume, and expectations that the Federal Reserve will lower interest rates once or twice for the rest of the year.
The U.S. economy also reached a record. June marked the longest expansion in U.S. history at 121 months, surpassing the previous record of 120 months from 1991 to 2001.
Central banks around the world announced easing of monetary policy which may further pressure the U.S. to do the same (read: lower interest rates). The German government bond (the Bund) interest rate reached an all-time low of negative .398%, as a result. That means an investor can buy a German 10-year bond for $1,000 and PAY about $3.98 per year for the privilege of owning it. Yikes!
This phenomenon of Central Banks lowering rates is certainly causing a “sugar high” for stock markets around the world but will do nothing to help interest rates in the fixed income portion of investor portfolios. It’s impossible to discern how much of the market success is a result of corporate earnings fundamentals and how much is from market manipulation (probably not intended) by central banks around the world.
The U.S. Treasury 10-Year bond has sunk below a 2% return, down from about 3.2% a year ago. It’s hard to get excited with a 2% yield when inflation is nearly the same amount. The Federal Reserve has a big decision to make this month regarding interest rates. Will they hold steady or lower rates? If they don’t lower rates we can expect a twitter barrage from the President aimed at Fed Chairman Powell. We’ll have to wait until the end of the month for that saga to unfold.
As the Italians say, “andiamo” (here we go), into Q3 and all that lies ahead.
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