Volatility returned to the U.S. stock market during the second quarter of 2019. By the end of May, broad U.S. stock indexes were below levels from the start of April. The S&P 500 actually traded below its 200 day moving average before a rally kicked off in June which ultimately delivered gains for the quarter.
During the period The Fed moved to a more dovish position, even hinting a rate cut may be needed to keep the economy growing. Data since The Fed raised rates has shown economic growth moderating and corporate earnings have slowing. We have not seen data suggesting inflation is on the rise which has helped the The Fed back off the need to raise rates. On the contrary, policy makers appear concerned about being the cause of an unnecessary slowdown, or even a recession, by raising rates too far too fast.
In terms of fiscal policy, there is little happening in congress regarding an infrastructure bill, or other spending programs, and there is little chance that will change before the 2020 elections. As long as interest rates remain attractive, lower taxes and regulatory reform seem to be working. In terms of the impact from tariffs, so far they appear muted but that could change. Eventually consumers can expect producers and distributors to start passing on the costs they are reportedly absorbing.
As we move into Q3 it appears we have stable and moderate economic growth combined with moderate inflation, an ideal condition for stocks and bonds. As a result, we have started Q3 strong and look poised to move further into new high territory.