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What To Consider Watching In June: Tariff Issues, Fed And Jobs Data

JJ Kinahan

A month ago, the June Fed meeting looked like it might be a turning point. After several years of rate increases, it appeared that many investors expected Fed Chairman Jerome Powell and company to loosen the screws a bit as the economy slowed.

That was then, this is now. As we head into June, chances of a rate cut look pretty slim, and that—along with the simmering China trade dispute—has contributed to the market’s recent rut. The unresolved tariff issues could continue to weigh on the markets next month, as they did for most of May. So could concerns about Brexit. 

As worries pile up, investors have seemed cautious. They seem to be taking a more-risk-off approach, apparently looking for what they might see as potentially safer places to put their money. The recent Treasury rally has been unrelenting.

Waiting On the Fed

With the June 19 Fed decision less than three weeks away, CME Group futures prices put odds of a rate cut at less than 7%. That’s down from odds of around 30% earlier this year and 20% as recently as a month ago. Since then, Powell has pretty much put the kibosh on investor hopes for rate relief, recently saying he thinks rates are at the right levels.

“Patience” seems to be one of the Fed’s favorite terms this year, and it came up again in the May Fed minutes released May 22.

“Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some time ... even if global economic and financial conditions continued to improve,” the minutes read.

One school of thought suggests that the Fed might be hesitant to quickly cut rates if there’s a soft spot in the economy because at current interest rate levels it just doesn’t have too many arrows in its quiver to address a major recession if one occurs. Keep in mind that the current Fed funds rate is well below historic averages, even if it seems relatively high compared to levels of basically zero between 2008 and 2015.

Anyone hoping for lower rates to potentially give the stock market another boost might have to be patient. Futures prices still build in around an 80% chance of a rate cut by year-end. That doesn’t mean much going into June, however, so bulls might have to rest their aspirations elsewhere, perhaps in geopolitical issues improving.

Chances of any near-term resolution with China seem to be retreating by the day, however, with President Trump saying in late May that he’s not ready for a deal and China’s government also sounding firm. U.S. stocks pulled back in May as the trade dispute festered, and could enter June down about 4% from all-time highs posted in late April. The Dow Jones Industrial Average ($DJI), which includes many big-name stocks with China exposure, has dropped five straight weeks, the first time that’s happened since 2011.

With the Fed and China seeming unlikely to ride to the rescue in June, investors might have to find their enthusiasm elsewhere. Earnings reports don’t resume until July. As it is, S&P 500 (SPX) earnings barely rose in Q1, and many analysts have said they expect them to fall year-over-year in Q2. So there’s really not too much support coming from that neck of the woods.

Perhaps the recent plunge in Treasury yields might give stocks some fresh energy. The benchmark 10-year yield fell below 2.3% in late May to its lowest levels since 2017. Lower borrowing costs can sometimes spark the economy, giving certain sectors a lift on Wall Street. For instance, 30-year mortgage rates have fallen from 5% early this year to current levels around 4%. That might give the housing and construction industries a little wind at their backs.

Overseas Events Bring Headwinds

Regarding China tariffs, there have been very few signs that the issue will be resolved any time soon. On the contrary, President Trump recent wrapped up a visit to Japan saying that while he thinks a deal with Beijing will come eventually, he’s not ready to make one yet. For investors, that could mean taking another look at how companies in their portfolios may be exposed to any China issues, such as relying on Chinese consumers.

On the Brexit front, Prime Minister Theresa May’s resignation has left the issue of a deal for Britain’s departure from the European Union in question. May failed to secure a deal despite numerous attempts, and now her departure could raise the chance of a “no-deal” Brexit. However, no one is sure exactly what that would look like, or how it would affect the markets.

Major Earnings Stragglers
While the most recent earnings season is essentially over, a few major companies do remain on the list to report. In June, investors can look for results from Nike Inc (NYSE: NKE) and Walgreens Boots Alliance Inc (NASDAQ: WBA) for some final notes on how the first 2019 quarter went. In general, retailers have put forth a mixed picture this past quarter, with online sales proving a source of strength for many.

NKE, which is scheduled to report June 27, is among the companies that might be interesting to watch for any China issue impact. NKE executives fended off tariff-related worries in Q4 2018  earnings call. The past month, as of May 28, shares have slid 6.1%, though the stock was still up 14.6% the past 52 weeks. The shoe retailer has been targeting China as one of its key growth markets, and indeed it’s seen double-digit gains in revenue there for the past 19 quarters. Last quarter, NKE’s revenue from Greater China increased 24%.

“We have great momentum in China,” NKE Chief Financial Officer Andrew Campion said in last quarter’s earnings call. “Even amidst current geopolitical dynamics, Nike continues to deliver strong and sustainable growth in China.”

Its next results later in June might help show if that statement still rings true, or if NKE now has cause for concern after the trade tension has escalated. One  cautious note to keep in mind, if Chinese consumers start to shy away from any price hikes as a result of tariffs, they do have other options in local competitors like Anta Sports Products Ltd.

Economic Reports in Focus

In early June, investors can be on the lookout for a number of key economic reports, including the Markit manufacturing PMI and motor vehicle sales June 3 and nonfarm payrolls, unemployment rate and consumer credit reports on June 7.

In May, the April unemployment report appeared to reassure the market that the employment scene in the U.S. has continued to stay strong, despite a stumble with the March figures. The unemployment rate fell to 3.6%, a roughly 50-year low with 263,000 new jobs created, well above expectations for closer to 200,000. Meanwhile wages increased 3.2% year over year. A up-cycle like this can help to feed wage growth, and perhaps more consumer spending as a result, because as companies compete for talent in a tight labor market, they often must increase wages.

Time for a Midyear Review?

With the year about half over, June could be a good time for many investors to check in on their portfolios for a midyear review. Whether on your own or with the help of a professional, you can take June as an opportunity to check if your allocations are still on track with your investment goals.

While the markets have made fairly steady gains this year with the S&P 500 (SPX) up about 13% year to date as of May 28, the past few weeks have shown that the good times don’t always last. The SPX was down about 4% from an all-time high in April. With stock losses in mind, midyear might be an ideal opportunity to assess how much risk you want to take in the market, given today’s market conditions, which has also seen volatility spike recently. For each investor, that answer will vary.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

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