After The Bell
Stocks on Friday faded into the close after this week’s strong rally fueled by optimism about interest rates and international trade ran out of steam as the weekend approached.
The S&P 500 reached a record intraday high before pulling back.
Investors are clearly bullish about prospects for lower interest rates in the months ahead. The Federal Reserve’s meeting this week did not guarantee that it would reduce rates, but the central bank opened the door for such a policy move, perhaps as early as next month, if conditions warrant.
Several lackluster economic data points of late have led to the thinking that the short-term rates controlled by the Fed need to be lowered. Long-term interest rates on government bonds have already fallen to near two percent for the 10-year Treasury note, or less than the fed funds rate.
One piece of today’s business news provided fuel for the idea that stimulus is needed. Research firm IHS Markit’s survey of purchasing managers pointed to slower growth in June in both the manufacturing and services sectors.
Other data was more upbeat, though. The National Association of Realtors noted that existing home sales in May rose 2.5% from April, in no small part because 30-year mortgage rates have fallen under 4.0%, versus nearly 5.0% in November. Mortgage rates have followed bond yields lower.
Meanwhile, renewed optimism that trade talks between the United States and China may yet bear fruit have also lit a fire under stocks. Negotiations had stalled, but there are signs that the two sides will renew efforts to reach an agreement.
In terms of stock market sectors, energy-related shares were among the session’s leading gainers, helped by higher oil quotations. The price of a barrel of crude oil in New York trading rose about $0.40 cents, to around $57.50 on the day, owing to tensions in the Persian Gulf between the United States and Iran.
A refinery fire in Philadelphia also raised concerns of tighter gasoline supplies on the East Coast, which could boost margins for petroleum product producers, such as Valero Energy (VLO).
At the end of the day, the Dow Jones Industrial Average was down 34 points; the S&P 500 off four points, and the NASDAQ slipped 20 points.
The good news is that stocks rose sharply on the week. But expectations for further positive developments are now high.
– Robert Mitkowski
At the time of this writing, the author did not have positions in any of the companies mentioned.
Before The Bell
Strong hints by the Federal Reserve Board that it could still cut interest rates this year, after some suggestions on Wednesday that such adjustments might be off the table until 2020, gave the bulls a strong jolt yesterday morning. Indeed, within minutes after the open, the Dow Jones Industrial Average was already up by some 250 points. Should the economy press forward at a steady clip over the balance of the year with the help of a trade deal with China, such rate reductions might not take place. However, if the business backdrop weakens notably, such downward adjustments could be forthcoming as soon as the July FOMC meeting.
In all, the strong early gains lifted the S&P 500 Index to a record high, while pushing the Dow to within a percentage point of a peak. What brought this latest surge in an already strong month about were signs that the Fed was ready to cut rates and perhaps as soon as next month. Indeed, Fed Chair Powell said that the case for lower rates was building. Policymakers also dropped the word patient from the Fed's statement and affirmed that inflation was now running below the central bank's 2% target. The Fed's acknowledgment on rates sent the yield on the 10-year Treasury note to just below 2.00%.
Among individual groups, some high-profile tech names did well, while energy stocks jumped on a 4% surge in oil prices following a further escalation in the confrontation between our country and Iran. Shares of Exxon Mobil (XOM –Free Exxon Mobil Stock Report), for example, were up by almost 2% during the morning hours. The market then would give ground late in the morning, with the Dow Industrials briefly losing about three-quarters of its erstwhile 250-point advance on growing fears about escalating tensions with Iran. However, that setback would prove fleeting, and as the afternoon got under way additional buying took hold.
That upturn would soon push the Dow ahead by 200 points once more on the more dovish Federal Reserve monetary posture was digested. It seems that for the moment, at least, interest rates have overtaken trade developments as the primary area of focus for Wall Street. And that is understandable given that the G20 conference where the United States and China are scheduled to talk about trade is still a week off. For now, hopes are fairly high that some progress might be achieved, although given the numerous times that we have seemingly been close to a deal when optimism faltered, we are taking a wait-and-see approach.
The market then drifted still higher into the close, with the Dow climbing above the 225-point mark on those rate hopes and in spite of the Iran standoff. All told, the Dow would climb to near a 300-point advance in the closing minutes before taking a minor step back. The S&P 500, meantime, would add 28 points, surging to a record high, while the NASDAQ would add 64 points. Gaining stocks, as would be expected, would hold a formidable edge, with energy issues leading the way. Treasury note yields would close lower, while the VIX Volatility Index would nudge higher.
Now a new day dawns, and with the Dow fewer than 200 points from an all-time high, the challenge will be to make a record in the next few sessions, or sooner. As to the direction of trading today, we see that stocks were mixed in Asia overnight, while on the Continent the European bourses are generally higher in spite of the increased tensions with Iran. Also, Treasury note yields are up a bit and oil prices are edging higher. Moreover, as we stand on the cusp of an all-time high in the Dow, the early read on the U.S. equity futures is little changed. Finally, in news of note, the monthly report on sales of existing homes will be out later. Stay tuned.
– Harvey S. Katz, CFA
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
