Markets jump in June but hopes from a Fed rate cut “is a mistake”

The S&P 500 rose 6.9 percent in June, its best June gain since 1955. It gained 17.4 percent over the first half of the year.

The rise in the S&P 500 means that it is now trading at a price-to-earnings ratio of 21.83, compared with a 10-year average of 17.87.

It is not just stocks that has been rallying. So are bonds and gold.

Mark DeCambre at MarketWatch noted that the US 10-year Treasury yield finished last week at 2 percent, about half-a-percentage point below the 10-year average of 2.482 percent, while the price of gold finished at US$1,413.70, not far from its highest level in six years.

DeCambre also noted that Bank of America Merrill Lynch analysts led by Michael Hartnett, the chief investment strategist, say that investors have never been so negative on a market that is rallying so briskly while Lindsey Bell, investment strategist at CFRA, said that “things can quickly change on a dime”.

Indeed, while markets have been rising on the perception that the Federal Reserve will ease monetary policy, John Hussman reminded us that “with the exception of 1967 and 1996, every initial easing of monetary policy by the Federal Reserve has been associated with an oncoming or ongoing recession”.

“Blind faith that rate cuts are always positive for the stock market is a mistake,” wrote Hussman. “This assumption is likely to be the hook that keeps investors holding on through a 60-65% market collapse over the completion of this market cycle.”