The Trump bull rally that has been raging in the past few months have come to a halt in June. Let us take a look at some of the significant events for the month and its complication
Mess at UK Election
The UK Prime Minister Theresa May called for an election in a bid to strengthen her coalition going into the Brexit talks with the European Union. Her lead in polls have been derailed by a series of campaign communication errors and terrorist attacks, leading to the Conservative party in losing their parliamentary majority.
Results: The stock market barely blinked at this political disaster.
Oil Market Crash
The oil market went into a bear market, despite efforts by the OPEC nations and Russia to pop up the price via production cuts. The US shale producers increased their production in respond to the rising prices creating a sudden surge in supply in the market. Oil price fell to $42 from a high of $57 seen at the start of the year.
Result: The decline in the stock price of Oil companies dragged down global stock prices
Central Banks Increasingly Hawkish Stance
Other than maintaining their stance of 3 interest rate hikes for the year, the US Federal Reserve is looking to unwind their 4.5 trillion balance sheet as a result of securities buying due to Quantitative Easing. The EU central bank also noted that the European economy is getting stronger and it may be time to start tapering on their QE program. China's debt level reached a new record level again, prompting Moody to downgrade its credit ratings. The Chinese central bank, in a bid to lower the leverage level, has been unwinding the loose monetary policies implemented last year to stabilize a crashing stock market and slowing economy.
Result: Stock market tumbled as the fear that one of the key drivers of stock market returns may be removed in the near future.
Technology Stock Slipped
Major technology stocks slipped during June despite not having any major driver for its downtrend. Analysts are worried that the valuation of technology stock has risen too fast too much in the fast few years.Results: The Tech stock decline affected the US Stock market and the impact is much greater than oil companies as the result of the higher weightings in the S&P500 as compared to oil.
What does this mean?
Some say that this is a foreshadowing of a major correction in months ahead as a result of an irrational run for the past few months. Some say that it is a temporary blip and the market fundamentals are still strong. In my opinion, I will watch the actions of the central banks closely and if there is a tightening of monetary policies around the globe, the high debt level that has been accumulated as a result of a prolonged zero interest rate environment will come back to haunt us.
On another note, Jim Rogers thinks that the market may crash this year.
Portfolio Strategy
A combination of falling oil prices and USD/SGD has offset the majority of the gains made by the the general stock market in the past few months. The stabilization of the oil and USD has benefited the portfolio tremendously, while the tech market correction has minimal impact on the portfolio. Oil prices seem to have found an equilibrium between $40 - $50 and probably will stay in that area unless there are new developments. Meanwhile, First State Global Resource which is made up of a diversified group of resource related stock held up very well in the face of the oil price crash, thanks to its diversification into other resource sectors which is not affected by the oil crash. Meanwhile, the short duration high yield bond is performing well as compared to the USD money market fund by 1.25%. I expect the USD to start rallying in the near future as funds as the fundamental of an interest rate differential will prevail. The market is looking increasing nervous as a glowing US job report has traders worry that the US central bank will tighten faster than expected. After months of low volatility, expect some tremors ahead as it has always been the nature of markets to be calm before a major storm. The sectors that are the most severely hit will probably be the market leaders of tech and China related stock, which the portfolio has few exposure to.
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