June Is Busting Out All Over

 

The end of May saw a rush of volatility, as if the markets were suffering from seasonal allergies.

The S&P 500 index rose or fell by more than 1% in three of the four trading days in May’s final week, following the Memorial Day holiday, while the Dow Jones Industrial Average gained or lost at least 200 points every session.

Then, having gotten the bugs out of their system with one big sneeze, markets quietly started marching higher.

From May 29th through early Friday afternoon, the Dow gained almost 900 points, while the S&P 500 added nearly 100. The Nasdaq Composite index and the Russell 2000 small cap bellwether both hit all-time highs. And the CBOE Volatility index—the VIX—held fairly steady, about 13 or so. That’s much higher than its all-time low of 9.14 last November, but well below its average around 20.

So, it looks like markets are settling down a bit. Or are they?

As I’ve written here many times, market fundamentals are very good—a strong economy, outstanding earnings growth and modest inflation. That allows the Federal Reserve to gradually raise interest rates to a more “normal” level and to slowly unwind the huge inventory of bonds it put on its balance sheet in three rounds of “quantitative easing.”

The other side of the coin is the erratic policy making of President Donald Trump, who over the past couple of weeks has veered between threats of open trade wars to caving to China with a penalty for electronics company ZTE reminiscent of the kinds of “settlements” Eric Holder’s Justice Department worked out with big Wall Street and European banks.

The president has turned the latest G7 summit meeting into a shambles by lobbing rhetorical grenades at Canadian Prime Minister Justin Trudeau, the host and leader of our next-door neighbor, and the rest of the G7, who include our closest allies, and instead calling for, of all people, Russia to be reinstated to that august body. No Collusion!

And next Tuesday, he will meet in Singapore with North Korean president Kim Jong-Un in the first summit ever between presidents of the two nations. The meeting may result in real steps towards peace and denuclearization on the Korean peninsula or it may break down and push the region closer to nuclear war. Yes, the range of possible outcomes is that wide.

The point is, investors can’t look only at fundamentals and ignore the political uncertainty, nor vice versa. The battle between a strong economy and good earnings on one hand and erratic policy making on the other will continue as long as Donald Trump is president.

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