The major indexes were mixed for the week. The large-cap benchmarks moved back from the record highs they had established the previous week, while the S&P MidCap 400 Index and the small-cap Russell 2000 Index recorded modest gains but remained below their late-2018 peaks.
Traders note that technical analysts on Wall Street are particularly focused on whether stocks will break with a recent pattern of pulling back from new highs.
The record established by the S&P 500 during the previous week was the fourth such run in the past 17 months, with all occurring within a 3% range (2,872 to 2,950).
Trading volumes picked up early in the week, and investors prepared to adjust portfolios in response to the annual reconstitution of Russell’s U.S. benchmarks, which sees companies moved among indexes based on changes in market capitalization.
The Wall Street Journal reports that last’s year reconstitution resulted in roughly $100 billion in stocks trading hands in the final seconds of that Friday’s trading session as index funds, in particular, made adjustments to their portfolios.
Two large mergers were announced during the week.
Eldorado Resorts reported that it will acquire Caesars Entertainment in a roughly $17 billion deal that will create the largest U.S. gaming company.
In an even larger transaction, drugmaker AbbVie announced plans to acquire rival Allergan for roughly $63 billion in cash and stock.
As investors awaited second-quarter earnings reports, sentiment appeared to be dominated by geopolitical concerns.
A further ratcheting upward in tensions with Iran sent oil prices to their highest level in a month, benefiting energy shares.
On Tuesday, stocks appeared to fall in response to warnings from White House officials that no broad trade deal with China was expected to emerge from the upcoming Group of 20 (G-20) summit in Tokyo.
Administration officials also stated that the U.S. was not prepared to offer China new concessions.
Stocks bounced back in early trading Wednesday following remarks from Treasury Secretary Steven Mnuchin, who estimated that negotiators were “90% of the way there” in reaching a deal. Stocks soon surrendered their gains, however.
Another factor weighing on sentiment at midweek may have been remarks from Federal Reserve officials, which proved less dovish than some had hoped.
On Tuesday the president of the Federal Reserve Bank of St. Louis and a notable advocate of easy monetary policy, voiced opposition to a 0.50 percentage point cut in rates in July, as some are advocating.
The political implications of Fed policy added another layer of uncertainty and appeared to be merging in potentially alarming ways with trade policy.
President Donald Trump stepped up his criticism of Powell and the Fed, tweeting that the central bank “blew it” by hiking rates and was acting like a “stubborn child.”
Traders observe that the market consensus seems to be coming around to the idea that President Trump will not sign a trade deal until he gets a rate cut to start a loosening cycle.
The week’s economic data generally missed expectations. Gauges of manufacturing activity in the Chicago, Kansas, and Dallas regions fell unexpectedly into contraction territory, and overall durable goods orders contracted much more than anticipated in May.
Along with trade concerns, analysts pointed to disruptions in the vast supply chain for Boeing’s troubled 737 Max airliners as a culprit. Consumers remained in generally good shape, with personal spending and income recording solid gains in May.
Weekly jobless claims rose a bit more than expected, however, and the Conference Board’s measure of consumer confidence in June fell sharply, hitting its lowest level in nearly two years due to “a less favorable assessment of business and labor market conditions.” Average hourly earnings also rose less than expected.
Following the May employment data release, futures markets were pricing in over a 98% probability of a rate cut in 2019, with an almost 90% chance of a cut by July, according to CME Group data
The weak data and geopolitical tensions sent the yield on the benchmark 10-year Treasury note below 2% for the first time since President Trump’s election victory in November 2016.
Investment-grade corporate bond spreads (an inverse measure of the asset class’s appeal) widened as investors reacted to comments from Powell and Bullard.
The firm’s traders reported that buyers became more active as the week progressed, however, which caused spreads across most sectors to retrace earlier widening. Meanwhile, the high yield market was largely focused on an active primary issuance calendar.
Source - Galt & Taggart
