We failed to penetrate the record highs in June, and then quickly fell to the lower end of the recent trading range as Brexit stunned the world.

The Big Picture

Brexit is shorthand for Britain exiting the European Union, a confederation of 28 nations cooperating economically for nearly 60 years.  But while voters Brexit and bought it, the ramifications on this side of the pond were short lived.  Once the magnitude of the UK’s decision became known, and the uncertainty going forward, a flight to quality ensued.  The dollar roared higher against the pound, with currency traders calling for parity by the end of the year.The 10-year U.S, Treasury saw such demand that the yield dropped to a near-record low of 1.37%.  Bonds usually trade inversely to stocks, but not this time.  After falling nearly 1000 points, the Dow Jones Industrial average bounced to close back over 18,000.

The S&P, in concert with the Dow, quickly shed more than 100 points, and then bounced just as quickly back over 2100 as bargain hunters swooped in.

Fears of a U.S. recession were stoked on the initial Brexit vote.  However, the impact of Brexit will be felt more in Europe and the European Union, where Britain is the second largest trading partner.  Rules and regulations will have to be re-negotiated with anger and recriminations festering as with any divorce.

So while Europe gets its act together, the US markets will focus on domestic economic fundamentals; growth, employment, inflation, etc.

I, Investor

Last Friday’s unemployment report sparked a strong stock market rally.  The economy created 287,000 jobs in June after a revised May report of just 11,000 jobs created.  The three-month average now stands at 147,000 jobs and, with little or no inflation, coupled with an expectation of modest second quarter growth of 2.4%, the outlook has brighten considerably.  First quarter 2016 growth was revised to a better than expected 1.1%, giving rise to what many call a “Goldilocks economy”; not too hot, not too cold.

With the end of the second quarter now behind us, we get to anticipate earnings reports.  As usual, expectations have been lowered dramatically, so most surprises will be to the upside.

For the quarter, the Dow Jones Industrial Average rose 1.38% and is now higher by 2.9% so far in 2016.  The S&P 500 gained 1.9% in the second quarter and is now better by nearly 2.7% for 2016.  The tech heavy NASDAQ remains in the negative column, having lost 0.56% in the second quarter and off by 3.29% for the year.

We’re also trying to guess what the Federal Reserve is going to do at its July 26-27 policy making meeting.  The strong June jobs report puts a possible rate hike on the table, but I would caution that one report cannot be considered a trend.

Expect more declines in the price of crude oil as the world is awash in supply, which is great for consumers, and keeps inflationary pressures at bay and maybe the Fed on hold.

With these tail winds, expect stock indices to press higher into new, uncharted record territory.  Let the summer rally begin.

Speak Your Mind