The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!” – Warren Buffett
Between the North Korean summit meeting, the Federal Open Market Committee (FOMC) meeting and the European Central Bank (ECB) meeting last week, there was plenty of important news to move the stock market but when the closing bell finally rang on Friday, the S&P 500 Index was unchanged. The other two major stock averages had entirely different reactions to the news events of the week. The Dow Jones Industrial Average dropped nearly 1% as the threat of tariffs hurt industrial stocks while the Nasdaq Composite Index jumped over 1% on the strength of technology and consumer discretionary stocks. None of the meetings seemed to have much impact on stocks. President Trump and North Korean dictator Kim Jong-un signed an agreement aimed at establishing a “peace regime” on the Korean peninsula but there were few details on the issue of denuclearization and sanctions will remain in place until the threat of nuclear weapons is completely gone. While the fact that the Federal Reserve raised the federal funds rate by a quarter of one percent was no surprise, the announcement that there would be two more interest rate hikes this year did come as a surprise. Fed officials cited solid economic growth and higher inflation expectations as reasons for the additional rate hikes. For the most part, the market shrugged off this forecast as investors focused on the strength of the economy and its positive effect on corporate earnings. At its meeting on Thursday, the European Central Bank left interest rates unchanged but announced that it will begin to taper its monthly bond purchases in October and end them altogether by the end of the year. Inflation in the euro zone still remains below the central bank’s target and the ECB will likely remain accommodative and keep interest rates at low levels. Even the Trump administration’s announcement that it will impose a 25% tariff on up to $50 billion in Chinese goods didn’t faze the stock market as most investors believe that negotiations will eventually lead to an agreement.
As far as the economic data was concerned last week, the biggest surprise was retail sales in May, which was twice as high as forecast. Retail sales in March and April were also revised higher, signaling that second quarter GDP growth will likely exceed 4%, fueled by tax cuts and strong employment growth. Core inflation data (excluding food and energy) as measured by the May consumer price index (CPI), producer price index (PPI) and import prices all rose modestly and were in line with estimates. In the 12 months through the end of May, the CPI has risen 2.8%. The National Federation of Independent small business optimism index rose to a 34-year high and weekly jobless claims fell by 4,000 to 218,000 as continuing claims are at their lowest level since 1973.
AT&T won its antitrust ruling to acquire Time Warner in a $85.4 billion deal and caused valuations to rise across the media industry. Comcast bid $65 billion for 21st Century Fox assets, topping Walt Disney’s prior bid.
For the week, the Dow Jones Industrial Average fell 0.9% to close at 25,090 while the S&P 500 Index was flat and closed at 2,779. The Nasdaq Composite Index rose 1.3% to close at 7,746.
Both May housing starts and existing home sales are forecast to increase over units that were reported in April and be consistent with a steadily improving housing market. Leading economic indicators for May are expected to show a moderate increase in line with April’s number and be further evidence that the economy is on solid footing.
The Bank of England is expected to hold its key interest rate at 0.5% and the Federal Reserve will release the results of bank stress tests.
Among the most prominent companies expected to report quarterly earnings this week are Lennar, FedEx, Barnes & Noble, Kroger, Carnival, CarMax, Darden Restaurants, Oracle and Micron Technology.
After a week that included a first ever North Korean summit meeting, a Federal Reserve meeting, two global central bank meetings and the imposition of tariffs on China, it is hard to believe that the S&P 500 Index closed virtually unchanged. All of these potentially market-moving events could have caused increased volatility but when it was all said and done, investors were indifferent. While the summit meeting between President Trump and Kim Jong-un was historic and highly publicized, it was essentially a first step in what promises to be a long and drawn-out process toward denuclearization. It also was a foregone conclusion that the Federal Reserve would raise interest rates by 25 basis points. Even though it forecast two additional rate hikes this year instead of one, investors chose to focus on the positive aspects of the Fed statement that said economic growth has been “rising at a solid rate”. The European Central Bank (ECB) and the Bank of Japan (BOJ) also appeased investors by leaving interest rates unchanged at low levels, sending a signal that they plan to maintain their accommodative policies for the foreseeable future. Finally, the market brushed aside the imposition of tariffs on China in retaliation for that country’s theft of intellectual property and technology and other unfair trade practices. Investors came to the conclusion, rightly or wrongly, that the tariffs are merely a negotiating tool that will ultimately lead to an agreement between the two countries. Given the muted reaction of the S&P 500 Index last week, the bark from these news events proved to be worse than the bite.