As predicted in our last newsletter, the China trade dispute took center stage in and was the dominant market driver for the month of May. Hopes for a quick resolution to the U.S.-China trade dispute faded in early as discussions broke down and rhetoric from both sides turned tough again. The disappointment lingered on Wall Street and stocks retreated from their recent highs. On Main Street, consumer confidence was strong and inflation tame. Mortgage rates reached year-to-date lows, but the latest data on home sales showed weak spring buying. The price of crude oil fell significantly, and so did the yield on the 10-year Treasury reiterating concerns for many that economic conditions may be slowing. (1)
Trade, Trade, Trade
On May 5, President Trump announced that U.S. import taxes levied on $200 billion of Chinese products would soon rise from 10% to 25% and that virtually all other goods arriving from China would “shortly” face a 25% tariff. China retaliated, declaring that it would hike tariffs already imposed on $60 billion worth of American products. In the past week, President Trump announced proposed new tariffs on Mexican imports unless the country takes drastic measures to reduce illegal immigration into the United States. (2,3)
All of these developments caused weakness in an already over-bought market which had surged off of the December 24th lows, and during the month of May which historically has been known as a bearish period. It is important to note once again that the Chinese trade negotiations are controversial, both in political and economic contexts. However, if some type of trade reform is not established with the Chinese government, they will likely become the dominant global economic powerhouse commencing sometime within the next decade.
On the flipside of that statement, China's strategy is likely to "run out the clock" leading up to the next U.S. presidential elections, causing political harm to the President and potentially forcing him to cut a deal. The stakes are very high, and of course there is no way of predicting the outcome.
The real estate sector, which is an important economic indicator, continues to show some relative weakness. While mortgage rates dropped to 3.99% in the last week of May, it did not help to spark resales of residential homes, which weakened by 0.4% and after a previous decline of 4.9% in March. New home buying also slowed 6.9% for the last reporting period of April. Homes are still appreciating, however, with the latest 20-city S&P/Case-Shiller home price index, which is the largest-watched indicator, printing a 2.7% gain for annual appreciation for the period ending March 2019. (2,3)
As of the writing of this newsletter, the broad S&P 500 Index has already retraced close to 50% of the last month’s pullback. However, we expect continued "whipsaw" market action with large daily moves in the coming months. These moves will be headline driven, as was the case in May. Although risks have increased, we are still well off the lows made at the end of 2018 and remain in a large trading range. Many fundamental economic indicators remain strong and all eyes will be looking towards the Federal Reserve with hopes of interest rate cuts to spark another rally.
Monthly Financial Tip:
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1 - barchart.com/stocks/indices?viewName=performance [5/31/19]
2 - investing.com/economic-calendar/ [5/31/19]
3 - freddiemac.com/pmms/archive.html [6/2/19]]
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.