Economy Strengthens and Stock Market Moves Higher

In May the U.S. economy continued to strengthen and the stock market continued its volatility.  Reports at the end of the month of a stronger than anticipated jobs report coupled with an incremental increase in the hourly wage were well-received.  Rising wages keeps inflation in the 2% range which is the goal of the Federal Reserve.  Many analysts believe the positive economic reports will support the Federal Reserve’s intent to raise short term interest rates another 0.25% in June.  It is expected that a third increase in 2018 may come later in the year followed by three in 2019.  This is a measured pace and should not be a damper on economic growth.

Even with the volatility, the broad domestic market moved ahead for the month of May.  The biggest gainers were the growth oriented NASDAQ stocks and the small caps.  With the strong economy many wonder why the stock market does not surge ahead to the late January highs.  The list of concerns is long and results in a lot of back and forth in stock prices.

One factor which contributed to the ups and downs in the stock market in May is the tariffs on our allies with the heightened rhetoric regarding trade.  It is best to wait and see how the market works this out and not run ahead of it making investment decisions.  It is entirely possible it will be more words than actions and will end positively for the U.S. economy.

The uncertainty leading up to the North Korean summit in June was a concern but differences were managed and the talks are in process now.  That the leader of North Korea is meeting with an American president is unprecedented.  If positive gains can be made to make the world a safer place, that will be good for everyone and good for the stock market.

Italy’s threat to pull out of the EU just as the UK did a couple of years ago brings an element of concern to the U.S. market.  It would be potentially destabilizing to the EU and the Euro, but the odds are right now that won’t happen.  Stock markets in Italy, Greece, Spain, Germany and France as well as some in South America and some areas of Asia are negative.  However, economic reports out of the UK are more upbeat even in the face of Brexit.

The U.S. stock market is much stronger now than others around the world.  According to The Chartist in its May 31st issue, the U.S. is the best performer based on 25 international ETFs.

The outlook for the market remains positive.  The S&P 500 moved above its 50 day moving average on May 9th and remained in that territory for the rest of the month.  In the first seven trading days in June it has continued to climb higher and the S&P 500 is very close to 2,800 points once again.  In March it rose to this level only to fall back and test the February lows.

If buyers push the index above 2,800 it would be a very bullish sign for this market.  It shows that buyers are outnumbering sellers in the battle over supply and demand.

The market can change quickly which is why we watch it closely, but barring any unusual event the strong economy should bode well for the market over the next few months.

Written by Connie C. Guelich, CFP, AEP, CLU, ChFC.  This represents our view at the time of this writing and is subject to change.  This is not intended to be personal investment advice.   If you would like to discuss your own account, please don’t hesitate to call us.  We are here to help and welcome your call.

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