The spring months for financial markets (Q2 2019) were marked with new all-time highs, increased volatility, and plenty of geopolitical tension. In April, the S&P 500 reached an all-time closing high. In May, many investors were spooked by the lack of progress in trade negotiations between the U.S. and China. Even though May showers were later than usual, they eventually led to June flowers. The S&P 500 reached another all-time closing high on June 20th.
Why did stocks in April continue to push higher?
- Even though wages grew slightly less than expected, the April jobs report showed a higher-than-expected 263,000 jobs added.
- Investors remained optimistic that the U.S. and China would resolve the ongoing trade war.
- The data that came out in April showed that the U.S. economy was still strong but no longer booming, and the S&P 500 reflected just that, ending the month up 3.9%.
Why did markets suffer, volatility rise and the S&P index decline almost 6% in May, making May the first down month of Q2 2019?
- Hiring slowed, and the Leading Economic Index (LEI) remained flat in May, following increases in each of the three months prior.
- Trade negotiations broke down between the U.S. and China, and the U.S. announced it would move ahead with tariffs.
- Near the end of May, the White House issued a statement declaring it would impose a 5% tariff on all goods coming in from Mexico starting June 10th.
Why did the markets recover so quickly and hit another all-time high in June?
- Tariffs scheduled to be imposed against Mexico were called off, and trade negotiations between the U.S. and China resumed near the end of the month.
- The Fed left interest rates unchanged but showed an openness to cutting rates in the future, which was significant as cutting interest rates could potentially prolong the growth of the U.S. economy. *
*Why would an interest rate cut help the economy and prolong U.S. growth?
Lower interest rates stimulate the economy and promote growth. For example, people are more likely to borrow money and buy houses when interest rates are lower. The more money being circulated, the bigger the economy grows.
Then, why hasn’t the rate already been lowered if it will help the economy?
Because too much of a good thing can, in fact, be a bad thing, when consumers have too much money to spend, they want to buy more goods than the economy can produce, which then leads to inflation and, potentially, a recession.
To conclude, Q2 2019 has been full of tough political talk, new market highs, and increased overall volatility. Short-term volatility in the markets is inevitable. We understand that this unpredictability can be daunting, but it is important to remember not to let short-term market movements impact your overall long-term financial plan.