Arrow Created with Sketch. Market Commentary

Trade Winds Are Only a Minor Market Setback For the week of May 20, 2019

Key Market Data

05/10/2019 05/17/2019 One Week Change YTD One Year
S&P 500 Index 2,881.40 2,859.53 -0.76% +14.98% +7.24%
MSCI EAFE Index 1,865.10 1,868.61 +0.19% +10.65% -5.71%
Barclays Capital U.S. Aggregate Bond Index 2,112.58 2,119.58 +0.33% +3.57% +6.72%
10-year Treasury Note Rate 2.468% 2.392% -7.6 basis points -29.3 basis points -72.0 basis points

The word of the week, once again, was trade. Stocks were largely driven by the latest news from China, auto tariff threats and a deal to roll back some tariffs on steel and aluminum from Canada and Mexico. The major indexes plunged on Monday after China announced retaliatory trade measures — the Dow dropped 617.38 points. Despite a mid-week rebound, the Dow was down for the fourth week in a row, its longest losing streak since 2016. Both the S&P 500 and the Nasdaq were off for the second straight week. Even so the three major indexes finished the week near or at double-digit advances for the year.

Going into last week, investors were waiting to see what China would do to respond to the higher tariffs that President Trump had put in place the preceding Friday — and his threat to issue new tariffs on another $325 billion in Chinese goods, effectively covering everything the U.S. imports from China. Retaliation was quick. On Monday China said it would raise tariffs on $60 billion worth of U.S. goods from 10 percent to 20 or 25 percent as of Jun. 1, sending the stock market south. “Both sides will suffer on this,” said Larry Kudlow, the Director of the National Economic Council, but he added, “You’ve got to do what you’ve got to do.”

There were glimmers of hope during the week. For instance, Treasury Secretary Steven Mnuchin said he would soon be meeting with the Chinese (though the Chinese indicated otherwise). And President Trump said he planned to meet with China’s President Xi Jinping at the G-20 meeting in Japan late in June, and that he expected “a very fruitful meeting.” He also said he hadn’t decided on the next round of tariffs yet, but added, “I love the position we’re in.” The stock market began its rebound on Tuesday after President Trump described the impasse with China as “a little squabble,” and noted, “When the time is right, we will make a deal with China.” Trump once again called on the Federal Reserve to lower its rate to help stimulate the American economy and give the United States an edge in its trade war with China.

“Foreign adversaries” targeted

On Wednesday, President Trump further raised the stakes with China when he signed an executive order that would ban the use of telecom equipment from “foreign adversaries … posing an unacceptable risk.” The White House said the plan was “agnostic,” not targeting any particular country or company, but China’s telecom giant Huawei is expected to be punished by the order. In addition, the Commerce Department said it would add Huawei to its “Entity List” of countries that engage in suspicious activities, which could bring an end to Huawei’s access to the American-made parts that it relies on.

Auto tariffs on hold, progress with the USMCA

On Friday, the White House moved to ease trade tension on other fronts, first saying that any tariffs on cars and auto parts from the European Union and Japan would be put off for six months. A few hours later, Trump said that a deal had been reached to exempt Mexico and Canada from the recently imposed tariffs on steel and aluminum, seen as a key step toward ratifying the proposed United States-Mexico-Canada Agreement (USMCA). The steps were applauded by the GOP and Democrats alike, with Senator Charles Schumer (D, NY), tweeting, “The pressure must be strong on China, not on our allies who we should encourage to join us in confronting China.”

China feels the pain

There was also evidence that China’s economy is suffering because of the trade war, with the readings for industrial production, fixed-asset assessment, and retail sales all declining in April, the latter falling to its slowest pace since 2003 (though figures are complicated by China’s late Lunar New Year).

Apple’s apps and Disney’s acquisition

The Supreme Court ruled that consumers can sue Apple for forcing them to buy apps from its app store. And Disney made a deal with Comcast to take full control of the Hulu television network; both have had partial control of Hulu since it was launched in 2008.

Retail sales and industrial production fall

In other news, retail sales fell 0.2 percent in April, coming on the heels of a 1.7 percent gain in March. Industrial production declined 0.5 percent in April from March, while manufacturing production was off 0.5 percent in April, the third drop in the last four months. Because of the reports on retail sales and manufacturing, some analysts cut their forecast for second-quarter GDP growth to 2 percent. Capacity utilization fell 0.6 percent to 77.9 percent. Import prices rose 0.2 percent in April from March and were down 0.2 percent year over year. Export prices were up the same 0.2 percent from the month before and 0.3 percent for the year. Housing starts advanced 5.7 percent in April from March to 1.235 million, above expectations. The National Federation of Independent Business said its small business optimism index was up 1.7 points in April to 103.5. The National Association of Home Builders’ housing market index was 66 in May, an increase of 3 points from April’s reading of 63; any number above 50 indicates a positive outlook. Business inventories were unchanged in March from the month before. The University of Michigan’s preliminary reading for its consumer sentiment index rose sharply from 97.2 in April to 102.4 in May, a 15-year high. First-time jobless claims fell 16,000 to 211,000 for the week ending May 11; the four-week moving average was up 4,750 to 225,000.

A look ahead

This week’s releases will include the latest on new and existing home sales, consumer comfort, Markit’s manufacturing PMI, and the preliminary readings for orders for durable and capital goods. The Fed will also release the minutes of its most recent meeting on Apr. 28 and 29.

Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.