Investing

Wall Street Is Betting on Lower Interest Rates: What to Watch in July

Anna-Louise Jackson@aljax7
Twenty/20

Welcome to our monthly stock market outlook, where we preview what the pros will be monitoring and what everyday investors should know. Knowing what's happening in the market can make you a smarter investor and help inform your long-term strategy.

We're halfway through 2019, and the U.S. stock market is enjoying its best start to the year since 1997. July could deliver another month of gains for investors.

Not only did the market recover in June from a particularly bumpy May, but it also set a new record high, as professional investors started feeling more optimistic about the status of trade talks and the Fed's next steps. They have three reasons to think that market upswing will continue in July:

  • Wall Street is betting the Federal Reserve will cut interest rates. Traders want lower rates because they could stimulate growth amid signs the economy is slowing by making it cheaper for consumers and businesses to borrow money.
  • Professional investors are also hoping for some progress in the ongoing trade negotiations between the U.S. and China. That seems more promising after U.S. President Donald Trump and Chinese President Xi Jinping agreed not to impose new tariffs on goods from the other country and to resume talks.
  • July historically is the strongest month of the year, with average returns of 1.6% for the S&P 500 since 1928, according to Yardeni Research.

The past two months have proven it's important to stay in the market when investing for the long haul. Despite short-term disruptions, the market has always bounced back. Whether the market will continue to rally in July remains to be seen, but here's what to watch:

Traders want the Fed to cut interest rates

What's happening: The Federal Reserve meets for one of its eight annual meetings July 30-31, and Wall Street broadly expects central bankers will lower interest rates then. Ahead of that, traders will scrutinize the minutes from the Fed's June meeting—scheduled to be released on July 10—for clues about what policymakers are thinking.

Fed policymakers set a benchmark interest rate called the federal funds rate, which in turn affects the rates banks charge you on products like mortgages, auto loans, or credit cards. Traders feel like it's a sure thing that the rate—currently set at 2.25% to 2.5%—will be reduced to somewhere in the range of 1.75% to 2.25% at the July meeting.

Why it matters: Fed policymakers went from projecting as many as three rate hikes in 2019 to saying they wouldn't raise rates this year at all to signaling they're open to lowering rates instead.

This "complete reversal" in policy is a result of a similar "quick reversal" in economic reports, says Tracie McMillion, the head of global asset allocation strategy for Wells Fargo Investment Institute. The pace of U.S. growth has weakened, says McMillion—and that's why Wall Street expects lower interest rates: "The Fed laid the groundwork in June to cut rates and the market will be disappointed if that doesn't happen."

What it means for you: The interest rates set by the Fed affect the amount you earn on savings or that you pay on money borrowed, but you may not notice a drastic change right away. That's because Wall Street expects a rate cut that would essentially reverse the last rate increase in December.

You could see a more immediate impact with your portfolio if there are spikes in the market surrounding the meeting or other Fed-related news. Matt Watson, a portfolio manager with James Investment Research, points out that if traders see the rate cut as a negative—another sign the economy is slowing—the market could fall.

On the other hand, it could also rise again: Stock prices shot up following the Fed's meeting in June.

Economic reports could bolster the case for a rate cut

What's happening: The Fed's meeting is at the end of July, so traders will monitor a variety of reports to gauge the pace of economic activity. If these reports show growth has slowed further, that supports the case for a rate cut. But faster economic growth might cause the Fed to hold off for now.

The monthly employment report, scheduled to be released July 5, is the second most important market news for July, McMillion says. That's especially true after job growth lagged in May, she adds, since Wall Street is looking for further signs of weakness. Other reports to monitor include surveys of purchasing managers in the manufacturing and services industries.

Why it matters: The current economic expansion is now the longest in U.S. history, and the current bull market in stocks is, too. "Neither has to end on a certain date," Watson says, but those records make some people think that the next "recession is sooner rather than later."

In addition, until there's a trade deal between the U.S. and China—or some assurance one is coming—some of these reports are likely to show that companies are pulling back on spending, McMillion says. That can have broader implications for the economy.

What it means for you: A normal economic cycle includes several stages, from contraction to expansion. The good news, based on key indicators economists watch, though, is that a recession doesn't seem to be imminent.

The bottom line

It's normal for the market to experience some bumpiness in any given month. Use the news to help you understand what makes traders want to push stock prices higher or lower, rather than seeing it as a sign to act. Especially when you're investing for the long haul, keep perspective and remember that consistency is key.

After all, what we have seen in the past few months follows historical trends: The market has always eventually bounced back after a decline.

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