June kicks off what has historically been the weakest six months of the year for stock investors. Yet share prices have been rallying strongly in recent days, thanks to the strong performance of key technology stocks like Netflix (NFLX) and Apple (AAPL).
That helped push the Nasdaq Composite to a new high on Monday, rising above the 7,600 level for the first time, exceeding the highs hit in January and March. Tuesday followed with another record high close.
Investors were inspired by last week's robust jobs report (with the unemployment rate falling to just 3.8 percent) along with some calming of fears over the eurozone's fate, trade worries getting pushed to the sidelines and growing hopes for the U.S.-North Korea summit scheduled for June 12.
But investors aren't in the clear just yet: A number of major headwinds could well keep stocks within the confines of a large sideways churn that has dominated the action all year. The Dow Jones industrials index, for instance, is near levels it first reached in December.
Here are three things to watch for as this summer gets underway:
Bond market weakness
Fixed income is supposed to be a refuge from risk for investors. But in recent months, it has been the opposite as steady Federal Reserve interest rate hikes, higher energy prices and an upward push in inflation have weakened bond prices (which move in the opposite direction of interest rates). The iShares Investment Grade Corporate Bond ETF (LQD) is down 5 percent from its late December highs -- a year-and-a-half of dividends lost in price depreciation.
The iShares 20+ Year Treasury Bond ETF (TLT), which is supposed to be even "safer," has lost nearly 6 percent -- or more than two years' worth of dividends at the current yield.
This is a consequence of the U.S. economy entering the latter stages of its life cycle as monetary policy and the labor market tighten. Inflationary pressures are bubbling up. And thus, interest rates should continue to head higher. That will keep a lid on bond prices and put the hurt on investors holding a diversified portfolio.
My advice would be to shift this portion of your portfolio to a stable value fund offering less "duration risk," with the offset being a lower yield.
Rising global risks
It feels like trouble is brewing across the oceans. A rapid increase in the U.S. dollar since early February has dented vulnerable emerging market economies like Turkey and Argentina, where currencies are falling fast as capital moves into the U.S. That money is chasing the foreign exchange rate move as well as the recent uptick in U.S. interest rates.
Weaker currencies overseas have resulted in painful inflationary pressure (as import prices rise) in those countries, forcing their central banks to jack up interest rates to extremes. Argentina's rates are at 40 percent, with a 26 percent inflation rate. Turkey has a 16. 5 percent interest rate, with a 12.1 percent inflation rate. Mexico has a 7.5 percent interest rate, with inflation at 4.6 percent. Turkey's stock market has lost some 17 percent since February.
In Europe, a new populist government in Italy is preparing to take on the strict fiscal austerity policies enforced by the EU and its allies in Berlin. Rome is planning for new spending on social benefits funded by a quasi-currency scheme known as "mini-Bots" modeled on the Mefo bills used to arm Nazi Germany.
The "Trump effect"
And let's not dismiss the impact President Donald Trump could have in the weeks and months to come as the.
On Tuesday, White House economic adviser Larry Kudlow said Mr. Trump is contemplating a change in tactics for the NAFTA talks by splitting them between Canada and Mexico. A trade deal with China remains elusive as military tensions in the South China Sea heat up. And Europe is upset after the president's proposed tariffs on steel and aluminum imports went into effect. A breakdown in talks could raise concerns about higher import prices, lower export activity and a hit to U.S. corporate profits overseas.
And, of course, there's Special Counsel Robert Mueller's ongoing Russia investigation as November's midterm elections approach. The folks at Trader's Almanac note that June is the worst month for the major stock indexes during midterm election years -- with an average decline of 1.9 percent for large-cap issues.