May Market Update for 2019
Despite a tumultuous May, the Dow Jones Industrial Average and the broader S&P 500 have returned 9.0% and 12.2%, respectively, for the year through Thursday. The MSCI EAFE index, a measure of developed international stock markets, is up 8.1%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has dipped to 2.77% from 3.28% at 2018’s end. On a total return basis, the U.S. bond market has gained 4.4% for the year.
The U.S. economy keeps charging ahead. The most recent data on economic growth reflected an economy that grew at a 3.1% annual pace during the first three months of the year—slow growth, not no growth. For all of the trade-war headline turmoil, consumer confidence is at a six-month high. After all, it’s hard to keep a fully employed U.S. consumer down.
Headline risk is a constant for investors and we’ve had more than our fair share over the past month. As you know, we’ve developed several custom tactical strategies over the years that help us to read the market’s signals and react to them in a timely manner. We don’t trade every time a talking head starts yelling that the sky is about to fall. But if the data we’ve built our strategies on signals us to do so, we will begin to build a defensive position in our portfolios. We believe our level-headed approach and sharp eye on the markets should allow you to enjoy your summer.
A Rare-Earth Tariff Response
After weeks in which the U.S.-China trade fight was marked primarily by the escalating imposition of U.S. tariffs, China revealed it may have its own subtler tricks up its sleeve. China’s state-owned Global Times cautioned in an editorial that if the U.S. impedes the country’s economic development, “China will use rare earths as a weapon.”
As we have discussed in the past, China produces 80% of the world’s rare-earth metals—the necessary ingredients for everything from spark plugs to semiconductors, energy-efficient lightbulbs to x-ray machines; pretty much anything to do with the technology we use every day.
While there’s been little news of new or ongoing conversations between U.S. and Chinese trade negotiators, this latest gambit has surely sparked some back-channel communiques, at a minimum. It would be in all parties’ best interests if a full-scale trade war was averted. In the meantime, while rare-earth metals companies’ stocks have soared, China’s stock market has taken a tumble and is down 6.1% for the month.
Bond Investors Rush In
Even as the economy continues to demonstrate strength with a fully employed workforce and robust corporate earnings, some investors have begun to shift assets into bonds. U.S. Treasurys, the go-to in times of uncertainty, have benefited the most and as prices have risen, yields have fallen. The benchmark 10-year Treasury’s yield has again dropped below the 3-month Treasury bill’s yield—a so-called “inverted yield curve” where shorter-maturity bonds sport higher yields than their longer-maturity counterparts. With the 3-month Treasury out-yielding the 10-year by 0.11% this week, the steepest inversion since 2007, you may have heard one of the many pundits rushing to proclaim a recession is on the horizon.
As we’ve discussed before, the inverted yield curve does have predictive qualities, having preceded the last seven recessions. So, it should not be easily dismissed. However, the inverted yield curve is not a Swiss watch you can set your recession timing to. On average, there has been a lag of more than 12 months between the yield curve’s inversion and the start of a recession—and even then, we often don’t know that a recession has started for several more months.
Keep in mind that while predicting the last seven recessions sounds impressive, it is a very small sample size. Additionally, an inverted yield curve doesn’t tell us the length or severity of the next recession, nor how the stock market will perform before or during it.
We are keeping a close watch on the yield curve. But we view it as one factor among many that we consider when it comes to evaluating the state of the economy, the markets and the composition of your portfolio.
Final 3 points to make.
Home Builder Summary:
- Homebuilder sentiment saw a stronger-than-expected increase in May.
- The NAHB sentiment survey rose more than expected to 66 from 63 and expectations of 64.
- Looking at a breakdown of this month’s report by sales, traffic, and regional trends, gains were broad-based.
Homebuilder sentiment saw a stronger-than-expected increase in May, as the NAHB sentiment survey rose more than expected to 66 from 63 and expectations of 64. Even after this month’s increase, sentiment remains well off its cycle high of 74 from December 2017, but it does erase much of the swift leg lower we saw in Q4 2018.
Small Business Still Confident:
- In this month’s report from the NFIB, overall sentiment came in at a level of 103.5 compared to expectations for a reading of 102.0 and last month’s reading of 101.8.
- We’re still quite a ways from the cycle high of 108.8 reached last August, but also still comfortably above the historical average reading of 97.1.
- In this month’s survey, Labor Quality continued to top the list with nearly a quarter of respondents saying they are having difficulty finding qualified workers.
Consumer Expectations Surge:
- After a strong slate of economic data on Thursday, Friday’s data continued the positive trend with a much stronger-than-expected sentiment report from the University of Michigan where the headline index came in at its highest level since January 2004.
- While economists were forecasting the index to come in at a level of 97.2, the actual reading was much stronger at 102.4.
- The one head-scratcher? It’s a bit counter-intuitive to see consumer sentiment and the probability of rate cuts from the FOMC so high at the same time!
Thank you for reading and sharing.
CrossPoint Wealth