Capital Market Commentary

By: Stephen Clinton, President, Capital Market Securities, Inc.

July Market Update

July marks the beginning of the 11th year of the U.S. economic recovery that began in June 2009. Back then was the end of the Great Recession that followed the 2007-2008 global financial crisis. The current expansion has continued, uninterrupted, ever since. While the annual economic growth has not been remarkable, it has been stable. GDP growth has been around 2% for each of the years of the recovery. However, the recovery has led to a near 50-year low unemployment rate of 3.7% while holding inflation below 2%. Highlights on the economic front include:

  • On July 31, the Fed lowered its short-term benchmark interest rate by a quarter of a percentage point, the first rate cut since 2008. Previously, the Fed had conducted several rounds of raising rates as it expected inflation to surface due to the “full employment” conditions. Surprisingly, inflation has remained in check and concerns about the global outlook clouded by trade policy uncertainties allowed the Fed to concede that interest rates were too high.
  • The June quarter, for the second quarter in a row, saw industrial production decline at an annual rate of 1.2%. Capacity utilization for the industrial sector decreased 0.2 percentage point in June to 77.9%, a rate that is 1.9 percentage points below its long-run (1972–2018) average.
  • The trend in wage growth has slowed from late last year when wages were rising at their fastest rate in a decade. Average hourly earnings in June rose six cents, or 0.2 %. That kept the annual increase in wages at 3.1% for a second straight month.
  • Strong consumer spending in the second quarter helped bring the GNP growth to 2.1% in the second quarter. The growth in personal consumption expenditures were reported at 4.3%, compared to 1.1% in the first quarter.
  • Home price increases are cooling off after recording strong growth since the recovery began. The Case-Shiller National Home Price Index rose an annual 3.4% in May.
  • Big fluctuations in oil prices have occurred in 2019. First, prices surged 48.2% by April 25, due in part to rising tensions between America and Iran. Then prices plunged 20%, with headlines blaming slower global oil demand growth and weak manufacturing data.
  • The federal deficit is expected to top $1 trillion for the second year in a row. The principal factors leading to the deficits are the 2017 tax cuts while the federal budget exceeded the spending caps enacted by Congress in 2011 by $300 billion.
  • American farmers are hurting. Unusually heavy spring rains have delayed or completely prevented planting across many areas of the Midwest while trade disputes drag down agricultural exports and crop prices. The pain is spreading from farmers to businesses related to farming.
  • The stock market has been strong in 2019. The Dow increased 15.16% in the first seven months while the broader Nasdaq market increased 23.21%. Banks followed the upward trend, rising 15.06% as measured by the Nasdaq Bank Index. Banks are reporting strong financial results. Based upon the March FDIC Quarterly Banking Profile, banks increased their net interest income by 6% from the prior year leading to an improvement of profitability by 8.7%. Noncurrent loans are below 1% while banks increased their reserves for future loan losses. Capital ratios continue to climb. The Fed recently announced the results of its annual capital stress tests (CCAR) for large banks and reported no objections to any of their capital plans. This will allow for increased dividends and continued stock buyback activity for these banks.
  • Short-term interest rates have declined in 2019 with the 3-month T-Bill moving down from 2.45% at the end of 2018 to 2.08% at the end of July. The 10-year T-Note also declined from 2.69% to 2.02%. The yield curve is partially inverted, with the 3 and 5-year T-Notes trading below 2%.

Merger and Acquisition Activity

As of the end of July, bank and thrift merger activity was down approximately 10% from last year at the same time. The median price to tangible book for transactions involving bank sellers was 168%.

Capital Market Services

Capital Market Securities, Inc., has assisted clients in a variety of capital market transactions. For more information on our capital market services, please contact Stephen Clinton at 1.800.376.8662 or