Index – Month/Year to Date
Dow Jones -0.48%/-0.70%
S&P 500 +0.61%/+2.64%
10-Yr Treasury yield was 2.85% at the end of May and 2.86% at the end of June
The last month of the second quarter played out very much like the preceding four months: with record volatility in the overvalued stock market, long-term interest rates holding at their resistance level, inflation still below 2 percent, and the Fed pretending not to notice any of it.
The Dow Jones Industrial Average opened June at 24,635 and finished nearly 400 points down from that, but in between, it climbed nearly 700 points higher and fell more than 500 points lower.1 The S&P 500 and Nasdaq were equally volatile, thanks mainly to escalating concerns over Donald Trump’s trade policies and the threat of a full-blown trade war.
In the meantime, the Federal Reserve approved its second short-term interest rate hike of the year in June, bringing the current Fed funds rate up to 2 percent. They did this despite the fact that inflation is still below their 2 percent target and long-term rates are still stuck below 3 percent. Increasingly, they are flattening the yield curve, which could potentially hinder one of the most vital components of a strong economy: lending and borrowing.
Long-term rates will most likely continue to hit a strong resistance level at just below or above 3 percent for a variety of reasons. The yield on the 10-Year Treasury was at 2.85 percent when June started and at 2.86 when it ended—and never once did it notch above 3 percent during the month, as it had briefly in May.2 One of the main reasons this resistance level will most likely continue is that many big investors are going to remain committed to the bond market as a hedge as warning signs of the next major stock market correction continue to increase.
2018 could still be another double-digit year for the stock market, meaning that the market will either finish the year at least 10 percent higher or lower from where it finished in 2017. But, as the second half of the year begins, one possibility is probably definitely looking more likely than the other—which means portfolio protection has never been more important.
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