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Trade Fears Drive Stocks Down Again For the week of May 28, 2019

Key Market Data

05/17/2019 05/24/2019 One Week Change YTD One Year
S&P 500 Index 2,859.53 2,826.06 -1.17% +13.67% +5.71%
MSCI EAFE Index 1,868.61 1,853.26 -0.82% +10.11% -5.02%
Barclays Capital U.S. Aggregate Bond Index 2,119.58 2,125.20 +0.27% +3.84% +6.22%
10-year Treasury Note Rate 2.392% 2.321% -7.1 basis points -36.4 basis points -65.7 basis points

Investor fears over a prolonged trade war with China drove the Dow down for the fifth week in a row, its longest such streak since 2011. Just how acrimonious is it? Well, China blocked the much-anticipated “Game of Thrones” finale because of the trade dispute, according to HBO. As for progress, neither side has made concessions and no meetings have been scheduled — though President Trump and China’s President Xi may convene on the sidelines of the Group of 20 meeting in Japan on Jun. 28 and 29. In the meantime, stocks have been dropping and the price of bonds has been rising as investors look to safe havens. The yield of the 10-year Treasury fell to a 19-month low at one-point last week. But, so far, the stock market’s decline has not been nearly enough to undo the surge over the first four months of 2019, and the major indexes remain well up for the year to date.

RELATED ARTICLE: Trade Fears Re-emerge, Here’s What Investors Need to Know

Treading water in the trade war

Last week began with investors weighing the impact of the White House’s campaign against Huawei, China’s largest telecommunications company, to prevent it from buying American-made technology. The concern is over how the restrictions might hurt the sales, and stocks, of Huawei’s U.S. suppliers. Tech stocks suffered for the week, even after the White House offered a 90-day extension to some U.S. suppliers. And the war of words continued, with President Trump referring to Huawei as “very dangerous,” and China’s foreign Ministry accusing American politicians of continuing to “fabricate lies” about Huawei. Earlier last week, Xi said that China faced a “new Long March,” referring to a key event in his nation’s communist history and implying that China wasn’t likely to give in any time soon. In another sign of what may be a long battle, Trump said he was going to set aside $16 billion for farmers hurt by the trade war. In announcing the plan, the president denounced China’s tactics and said of the trade war, “We’re winning it big.” The White House also moved to open another front in the trade war when it said it may restrict the sales of video surveillance tech to China’s Hikvision. In addition, The Wall Street Journal reported that our government has been slow-walking its approval of Chinese citizens applying for jobs with U.S. tech firms.

The trade war’s impact

In addition to its drag on stock markets in the United States, Asia, and Europe, the trade war continues to impact global GDP. Last week, the Organization for Economic Cooperation and Development issued its latest forecast for global growth this year, lowering its estimate to 3.2 percent from March’s figure of 3.3 percent because of trade concerns, though it also raised its forecast for U.S. GDP in 2019 to 2.8 percent from 2.6 percent. The Federal Reserve Bank of New York said that the latest tariffs were costing the average American household $831 a year because of higher prices and reduced efficiencies.

May to step down

On Friday, Britain’s Prime Minister Theresa May said she’d step down as soon as a successor could be found. May failed to guide a fractious Parliament through Brexit. May said her successor will have to find “consensus in Parliament where I have not,” which could only happen “if those on all sides of the debate are willing to compromise.” She’ll officially resign in early June, but the race to replace her may not end until July. Boris Johnson, her former Foreign Secretary and a hardline Brexiteer, is an early favorite, leading to the possibility of the “no deal” exit from the European Union that many members of Parliament have tried to avoid. The EU’s stability could also be impacted by the fact that several populist candidates won seats in Sunday’s elections for the European Parliament.

The Fed

The minutes of the Federal Reserve’s meeting on Apr. 30 and May 1 showed what one might expect given its recent pronouncements: The Fed is in no hurry to raise or lower its benchmark rate. The minutes noted that the “downside risks” to inflation had increased but attributed that to “idiosyncratic” and “transitory” factors — inflation has been below the Fed’s 2 percent target since 2012. The minutes also noted, “Even if global economic and financial conditions continue to improve, a patient approach would likely remain warranted.”

A green light for a merger, and a merger for Fiat and Renault

Ajit Paz, the Chairman of the Federal Communications Commission, indicated that the FCC would not try to stop the merger of T-Mobile and Sprint. $26 billion after the two companies had made “significant commitments” that included Sprint selling Boost Mobile. And on Monday Fiat Chrysler announced a proposed merger with Renault which would make the new company the world’s third largest automaker behind Volkswagen and Toyota.

Oil falls, as do orders for durable goods

The combination of concerns about the trade war slowing global growth and higher-than-expected inventories sent the price of U.S. crude down 6.8 percent last week and back below $60 a barrel. In other news, orders for durable goods fell 2.1 percent in April from March’s downwardly revised gain of 1.7 percent. Most of the decline was the result of a 25 percent dip in orders for civilian aircraft mainly connected to Boeing declining new orders for its 737 MAX line in March or April. Orders for nondefense capital goods excluding aircraft were off 0.9 percent. Despite lower mortgage rates, existing home sales fell 0.4 percent in April from March to an annualized 5.19 million, according to the National Association of Realtors, and were down 4.4 percent from a year earlier. New home sales tumbled 6.9 percent in April from March to an annual rate of 673,000, the biggest drop since December, though sales were up 7 percent year over year. And first-time jobless claims for the week ending May 18 declined 1,000 to 211,000; the four-week moving average dipped 4,750 to 220,250.

A look ahead

This week’s releases will include updates on the S&P CoreLogic Case-Shiller home price index, consumer sentiment, retail inventories, the advance trade balance, pending home sales, personal consumption expenditures, and the next estimate for first quarter growth, forecast to come in at 3.10 percent compared to the previous 3.2 percent.

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.