By Pete Biebel, Senior Vice PresidentPrint This Post
Oh June, you ended too soon. The month following the May swoon saw markets go over the moon. The Dow Jones Industrial Average (DJIA) had its best June performance since 1938, climbing about 7.2%. The S&P 500 Index (SPX) gained nearly 7% for the month, making it its best June since 1955. The NASDAQ Composite Index (COMP) edged them both out with a 7.4% increase for the month.
Unfortunately, the gains of June followed a fairly miserable month of May for stocks. The net result was just a so-so second quarter following a very bullish first three months of the year. Over the past three months, the major averages all had net gains, but they were all in the range of just 2 ½% to 4%. Thanks to the June boon, the small gains of the second quarter, on top of the big gains in the first three months of the year, made for a pretty spectacular first half of the year.
The top four U.S equity sectors through the first half of the year were (from best to worst) Technology, Consumer Discretionary, Industrials and Communication Services with year-to-date gains of from near 20% to over 26%. With those sectors leading, it’s no surprise that COMP easily outperformed SPX and DJIA over that time. COMP was up 20.66% through June while SPX gained 17.35% (best first half since 1997) and DJIA managed a relatively paltry 14.03%. What may be even more surprising is that other asset classes including bonds, crude oil and precious metals also saw significant gains through the first half of the year.
While the market’s second quarter and year-to-date performances are noteworthy, its performance last week was disappointing. Recall that in the prior week, the market spiked higher on Tuesday and Thursday following dovish comments from the ECB and the Fed. The question then was whether the market would see follow-through gains or, as was the case in late-April, stall and reverse. SPX was able to briefly touch a new high early in the day that Friday but couldn’t hold the gain and ended the session near its low of the day. Hopes for follow-through faded further early last week as the major averages ended each of the first three sessions at or near their lows of the day. The promise of progress on trade talks at the weekend G-20 summit in Osaka contributed to the market’s rebound on Thursday and Friday. That late-week save lifted the averages to just small losses for the week and avoided a potentially more damaging loss in the week following a new high.
For the past month or two, I have suggested that the Russell 2000 Index of small-cap stocks (RUT) might be the best indicator of near-term performance for the overall market. Where COMP, DJIA and SPX all got back to or at least near their 2018 highs and spent most of the past three months above their 200-day averages, RUT hasn’t gotten anywhere near its old high and it spent most of the past two months below its 200-day. Year-to-date, RUT is up 15.14%, roughly in line with the major indices, but that’s after the index gained 14.17% through the first three months of the year. The small-caps were hot early in the year, but the fire went out for RUT in the second quarter. If the overall market is going to have a shot at significantly higher highs, then RUT needs to reignite and get back into rally mode.
The first spark may have come last week. RUT jumped 3.2% through Thursday and Friday to end the week with about a 1.3% net gain. The late-week rally also carried RUT back above its 200-day. None of the major averages were anywhere near that strong late in the week. One likely explanation for the unusual strength was that RUT’s annual rebalance occurred as of the close on Friday. That forced managers of funds that track the index to load up on the stocks that would see their weight in the Index increase. With the rebalancing phenomenon in the books, the next week or two will tell whether RUT can outshine the major averages or that the Thursday/Friday strength was just a flash in the pan.
The Russell rebalance probably also accounted for the spike in volume in the closing minutes of trading on Friday. Something around 1.5 billion shares were traded on the close that day. That’s mind-boggling volume. If that much volume had traded in a week back in the 70s or 80s, they would have closed-down the exchange for a day just to get caught up. Now a billion-and-a-half shares can trade in minutes without a hiccup. That’s more than the daily total NYSE volume on about 245 of the 250ish trading days in a year. Total NYSE volume on Friday was the second highest this year, higher even than the total on the “quadruple witching” options and futures expiration the previous Friday. Only the volume on the March quadruple expiration was higher. The volume totals on those three Fridays were about 50% above the fourth-best day. In addition to the Russell rebalance, a second factor that juiced-up the closing volume was the expiration of end-of-quarter options and futures.
As July begins, we’ll see the market’s reaction to the kabuki at the G-20 summit in Osaka over the weekend. Initial reports suggest that there were no negative surprises. Trade talks will resume, no additional tariffs on Chinese goods will we impose at this time and President Trump agreed to allow U.S. technology exports to a large Chinese conglomerate. The market’s initial reaction was positive. Stock index futures were trading about 1% higher on Sunday evening.
If SPX does trade 1% higher on Monday morning, it would mean July would be beginning with a new high on that index. Keep in mind that May also began with SPX hitting a new high on the first day of the month, but that was the high for the month and the index sold-off steeply from there. The key for the week will be whether the market can extend the early Monday rally or if opening gain is just another marginal new high flame-out.
The holiday-shortened week ahead will likely see trading activity slow considerably into and after the Fourth of July holiday. Ironically, the big economic data reports for the week come on Wednesday and Friday. With the thinned trader participation, a little push one way or the other, on either day, could go a long way.
|Monday 7/1/2019||PMI Manufacturing Index||50.5||50.1|
|ISM Manufacturing Index||52.1||51.2|
|Construction Spending, M/M||0.0%||+0.1%|
|Tuesday 7/2/2019||Motor Vehicle Sales, Annual Rate||17.3mm||17.0mm|
|Wednesday 7/3/2019||ADP Employment Report||+27K||+150K|
|International Trade. Trade Deficit||$50.8B||$53.2B|
|Initial Jobless Claims||227K||220K|
|PMI Services Index||50.9||50.7|
|Factory Orders, M/M||-0.8%||-0.3%|
|ISM Non-Manufacturing Index||56.9||55.9|
|Friday 7/5/2019||Employment Situation, Non-Farm Payrolls, M/M||+75K||+165K|
Links to previously published commentaries can be found at benjaminfedwards.com/Company News/Blog/Market