USA TODAY International Edition
Insiders worry June may be a shock to markets
Possible Fed rate hike, Brexit, poor job report are factors.
Wall Street is eyeing markets in June with suspicion and trepidation as traders monitor a number of potential shocks that could derail stocks this summer.
Investors are on high alert even though the Dow Jones industrial average is coming off its best weekly advance in 10 weeks. The Dow’s 2.1% jump was its best since the week ending March 18.
The angst is driven home by the foreboding language that evokes coming storms used by Wall Street strategists in recent investment reports. Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, warns that markets are entering “event risk June,” which could culminate in a “summer of shocks.” The investment team at Cornerstone Financial Partners says the market could be in for a “cruel, cruel summer.”
Are there land mines? “Yes, the potential is there,” said Brad McMillan, of Commonwealth Financial Network.
The key word, however, is “potential,” as the three shocks McMillan fears could upend markets most are viewed as low- probability outcomes. That’s precisely what makes the risks greater: Investors downplay worst- case outcomes and could be caught improperly positioned.
Adding to the sense of caution is that June is among the worst months for the Dow. Since 1950, it has posted an average decline of 0.3% in June, which ranks 11 out of 12 months, according to The Stock Trader’s Almanac.
McMillan ticks off three things that could cause market volatility to spike in June when stocks are fully valued if not overvalued and
corporate earnings are under pressure.
1. FED RATE HIKES The Federal Reserve’s next policy meeting is June 15 and chair Janet Yellen said Friday that it’s “appropriate” to increase interest rates “gradually and cautiously … in the coming months.” Though investors have come around to the idea that the economy can withstand another quarter- point increase, any signs that the Fed is thinking of following a June hike with multiple additional hikes could upset the bulls.
“There’s a big difference between saying we might ( hike) and here we go,” McMillan says. “If they do hike in June, then the question becomes do they hike two or three times, not one or two? And that’s a big shift.”
2. BREXIT IN EUROPE The fear factor related to the “Brexit” vote June 23 has diminished in recent weeks amid polls that suggest Brits will opt to stay in the 28- country European Union. The risk? If investors’ bet on what Bank of America dubs a “Bremain” is wrong and Britain leaves the EU. Such an event is not priced into markets and is likely to cause turmoil in Europe and the United Kingdom.
“The market’s looking at Brexit and yawning,” McMillan says. “( Britain) will probably stay, but the market could be wrong, and that is the type of Black Swanevent that investors should be looking at but are not.”
3. JOBS AND WAGE SURPRISE The May jobs report set for release Friday could also upset markets. If the U. S. jobs count comes in weaker than expected, after a disappointing 160,000 new jobs created in April, it could spark alarm that job growth is weakening, which would hurt the confi- dence of U. S. consumers.
“Two downticks in a row for jobs will rattle investors,” McMillan says. Why? The job market and consumer spending have been two of the bright spots driving the U. S. recovery.
On the flip side, if the job market heats up too much and puts upward pressure on wage growth, it could raise inflation fears and spook markets, says Dan Heckman, of U. S. Bank Wealth Management. While commodity prices, such as oil, rebound, it could put further pressure on the Fed to raise borrowing costs more aggressively to slow things down.