What Happened to the Summer Doldrums?

Key Points
  • The traditional “quiet” summer period has been absent as the trade skirmish, tighter monetary policy, and political wrangling persist. Markets continue to shrug off the concerns, with volatility in stocks, bonds and currencies all among the lowest in 25 years; but some caution is warranted.

  • Actual earnings results may be taking a back seat to forward-looking commentary surrounding capital spending, and the possible hit from rising trade tensions.

  • Central banks remain in focus globally, with yield curves being closely watched. The Fed has expressed little concern but financial conditions are tightening, which has implications for markets.

“Rest is not idleness, and to lie sometimes on the grass under the trees on a summer’s day, listening to the murmur of the water, or watching the clouds float across the sky, is by no means a waste of time.”
- John Lubbock

No time to watch the clouds

Many investors must have had a similar experience to us over the past several weeks—having family members get irritated that stock markets demanded attention in the midst of what was supposed to be a vacation. The traditional summer doldrums have yet to hit as the news flow continues to be heavy; however, significant up or down daily moves in stocks have been in a descending pattern since the February correction. Despite rising concerns surrounding trade, political wrangling, and Fed tightening, stocks are near the top of the recent trading range. Even with the move higher, however, we are becoming a bit more cautious and recommend that investors not chase the rally by moving out the risk spectrum; but remain patient, disciplined and diversified.

S&P to the top of the range, finally retaking the 2800 level

S&P 500 Composite

We remain in the secular bull market camp but maintain that any persistent upping of the antes by the United States and its trading partners with regard to tariffs and retaliations is a cyclical risk. One benefit of the trade uncertainty is that it’s allowed investor sentiment to move back into neutral territory from overly optimistic territory, according to the Ned Davis Research Crowd Sentiment Poll.

The latest round of proposed tariffs won’t go into effect until September at the earliest, leaving time for negotiations; however, there’s little indication that any serious negotiations are actually underway. And last week, President Trump again threatened to impose tariffs on cars and auto parts—which would represent a meaningful expansion of global trade tensions. There is some hope that political and economic conditions in Europe will support negotiations between those countries and the United States. France and Germany are facing political difficulties at home, with German Chancellor Angela Merkel facing a challenge to her leadership and French President Emmanuel Macron facing an approval rating drop to the lowest level of his term according to the Financial Times. Business (and consumer) confidence has held up in the United States; although the National Federation of Independent Business (NFIB) small business optimism index dipped in June (to a still-high level) and capital spending outlooks deteriorated within several regional Fed surveys. At the same time, confidence readings globally have rolled over more noticeably.

US business confidence remains elevated

NFIB Small Business Optimism Index

While some foreign regions have taken a hit

Zew Economc Sentiment Survey - JapanZew Economc Sentiment Survey - Germany

This deterioration in confidence could make foreign countries, other than China, eager to move past the trade disputes.

Corporate earnings news fights for attention

Earnings season has not yet been given its traditional high billing in terms of investor attention. Consensus expectations were high coming into earnings season and there’s no reason to think companies won’t hurdle that bar; but what may be of more interest is the level of trade-related concern business leaders express; and the amount of capital spending and/or investment they may put on hold in the face of the that uncertainty.

More broadly, the Atlanta Fed’s GDPNow forecast for second quarter real gross domestic product (GDP) growth is at a lofty 4.5%; at the top end of the Blue Chip consensus range. In addition, for the first time in the history of the Job Openings and Labor Turnover Survey (JOLTS) (although the data only goes back to 2001), the number of available jobs is greater than the number people unemployed. Economic strength and the tightness of the labor market suggests some corporate spending can no longer be put off.