June Market Commentary

US stocks increased in June, but eased off record highs on the potential for less supportive central bank policy. National US banks all passed the Fed stress tests and their capital plans were approved. As a result big banks will increase share repurchases and dividend payouts to their highest levels in years. Economic news was again generally positive, but some reports disappointed. US manufacturing activity expanded and picked up pace, the unemployment rate fell to 4.3% its lowest level in 16 years, but only 138,000 jobs were added and previous months were revised down by 66,000 jobs, new home sales rose 2.9% and prices hit a record high, durable goods orders fell more than expected, but it has shown gains compared to 2016, inflation eased for the third consecutive month to a 1.4% increase for the trailing year, and first quarter GDP growth was revised up again from 1.2% to 1.4%. US stocks gained 0.90% in June and 3.02% for the quarter. For the year to date they have risen 8.93%.

Foreign stocks rose in June, but similar to US stocks, finished below highs for the month on central banker comments. After the ECB meeting President Draghi revealed a more upbeat outlook. While they did not reduce any of the simulative actions they are taking, investors believe reductions may occur later this year. Italy said it was prepared to spend as much as $19 billion to shut down two regional banks to provide relief to the troubled banking sector. Economic confidence in the Eurozone reached its highest level since 2007. Emerging markets outpaced developed markets for the month, quarter and year to date. In June, international stocks rose 0.24%, bringing the second quarter performance up to 5.78%. Over the first half of the year foreign stocks have jumped 14.16%.

Bonds ticked down to end the month as investors considered the potential for less accommodative central bank policy. At the Fed’s June meeting, as expected, it raised the Fed Funds rate a quarter percent to a range between 1% and 1.25%. They still expect to raise interest rates one more time this year. It also spelled out how it would begin to unwind its $4.5 trillion bond portfolio later this year. It will start by letting $6 billion in Treasury securities and $4 billion in mortgage bonds mature without being reinvested and let that increase until a maximum of $30 billion in Treasuries and $20 billion in mortgages a month mature. ECB president Draghi alluded to the ECB cutting back its stimulus in response to improving growth in Europe. In addition, the chiefs of the Bank of England and the Bank of Canada said they would be pairing back stimulus in the future. The 10 year Treasury yield edged higher in June ending the month at 2.30% up from 2.20% to start the month, but is down from 2.45% to start the year. In June, generally longer term bonds trailed shorter terms bonds and credit bonds were the top performing sector. For the year to date longer term bonds have outpaced shorter term bonds and munis and credit bonds have been the top performing sectors. The broad bond market ticked down 0.10% in June, but gained 1.45% for the quarter. For the year to date bonds have added 2.27%.