Chevron left arrow. Market Commentary

Markets Drop in May Over Trade Fears For the week of June 3, 2019

Key Market Data

05/24/2019 05/31/2019 One Week Change YTD One Year
S&P 500 Index 2,826.06 2,752.06 -2.62% +10.73% +3.78%
MSCI EAFE Index 1,853.26 1,817.39 -1.94% +8.08% -5.16%
Barclays Capital U.S. Aggregate Bond Index 2,125.20 2,144.78 +0.92% +4.80% +6.40%
10-year Treasury Note Rate 2.321% 2.125% -19.6 basis points -56.0 basis points -73.4 basis points

What a difference a month — and a barrage of presidential tweets — can make.

At the end of April, thanks to the Federal Reserve’s promise of a “go slow” approach to raising its benchmark rate and the prospect of a trade deal with China, the S&P 500 and the Nasdaq were coming off all-time highs and the Dow was within hailing distance of its record close.

At the end of May, the trade war with China made the bulls go away. The trade war has escalated and late last week President Trump, who has nicknamed himself “Tariff Man,” threatened to hit Mexico with a series of punitive tariffs if it didn’t do something to curb illegal immigration. As a result, all three major stock indexes ended the week lower and for the first time this year, were down for the month. The markets are still positive for 2019. In addition, the yield on the 10-year Treasury dipped to a two-year low and had its biggest monthly drop since 2015. Investors at home and abroad were on edge about how the trade war could impact global growth.

On the first two days of trading last week (the market was closed on Monday for Memorial Day), the Dow dropped more than 200 points as the war of words and actions between the U.S. and China continued to heat up. In Japan, President Trump said he was “not yet ready” to make a deal with China. There was a glimmer of good news on Tuesday when the Treasury Department said it wasn’t going to brand China as a currency manipulator in its semiannual assessment, though it cited “significant concerns.” But then China pushed back. First, Huawei Technologies filed a motion to expedite its case against the White House for what it considers unconstitutional actions in blocking access to the American market. Then rumors swirled that China would not ship its rare earth metals, vital for high-tech products such as smartphones and lasers, to the U.S. Next, in response to the White House’s sanctions against Huawei, China’s Ministry of Commerce said that in the “near future” it was going to issue a list of “unreliable entities” that “seriously damage the legitimate rights and interests of Chinese companies.” And China’s government released a white paper in which it asserted that, “China will never give in on major issues of principle” when it comes to a trade war and “it isn’t afraid to fight,” but also noted, “We’re willing to adopt a cooperative approach to find a solution.”

The threat of new tariffs

On Thursday night, the trade war took a new turn. President Trump unexpectedly tweeted that on Jun. 10 he would put a 5 percent tariff on everything that Mexico sends to the U.S. and that he’d keep raising the tariff on a monthly basis until it hit 25 percent unless Mexico acted to stop illegal immigrants. While some saw the threat as his latest bargaining ploy — not long ago he pledged to close the Mexican border to all traffic before backing down — investors, congressmen, and, not surprisingly, Mexico’s president were all alarmed. Mexico shipped $346 billion in goods to the U.S. last year and in the first quarter of 2019 surpassed China and Canada to become our number one trading partner. The stocks of industries likely to be most hurt by the tariffs, such as automakers and oil companies, fell sharply on Friday, as did the peso. The tariffs, if imposed, could also derail the United States-Mexico Canada Agreement (USMCA) that Trump hopes will replace NAFTA. The response to the threat was quick — and largely negative. Chuck Grassley (R, IA), chairman of the Senate Finance Committee, said, “This is a misuse of presidential tariff authority and counter to congressional intent.” The U.S. Chamber of Commerce said it was considering taking legal action to stop the tariffs. And Mexico’s President Andrés Manuel López Obrador, who is sending a delegation to Washington, said, “I want to insist that we are not going to fall to any provocation.” He added, “We are going to act with prudence.” On Saturday, the president responded to the criticism of his threatened tariffs, tweeting, “When you are the ‘Piggy Bank’ Nation that foreign countries have been robbing and deceiving for years, the word TARIFF is a beautiful word indeed! Others must treat the United States fairly and with respect - We are no longer the “fools” of the past!”

A rate cut?

President Trump has been pushing the Fed to lower its rate and, last week Richard Clarida, the Fed’s Vice Chairman, said in a speech in New York that if there was a “persistent shortfall” in inflation and “global economic and financial developments” added up to a “downside risk,” the Fed might reconsider leaving its rate unchanged and could possibly cut it.

In other news last week, the government’s second estimate for first-quarter GDP growth came in at 3.1 percent, slightly down from the preliminary figure of 3.2 percent, but ahead of the 3 percent that had been forecast. The personal consumption expenditure price index advanced 0.3 percent in April from the month before and was up 1.5 percent for the year, below the Fed’s target of 2 percent for inflation. The core PCE price index, less food and energy, climbed 0.2 percent for the month and 1.6 percent for the year. Personal income increased 0.5 percent in April from March, while consumer spending was up 0.3 percent from March’s upwardly revised gain of 1.1 percent. The trade deficit was $72.1 billion in April compared to $71.9 billion in March. Retail inventories rose 0.5 percent in April from March; wholesale inventories gained 0.7 percent month over month. The S&P CoreLogic Case-Shiller home price index was up 3.7 percent in March from a year earlier. Pending home sales unexpectedly dropped 1.5 percent in April from March but were 0.4 percent higher than in April of 2018. The Conference Board’s index of consumer confidence rose from April’s 129.2 to 134.1 in May, not far from the eighteen-year high it hit last fall, but the University of Michigan’s consumer sentiment index fell to 100 in May, down from the initial reading of 102.4. And first-time jobless claims for the week ending May 25th rose 3,000 to 215,000; the four-week moving average fell 3,750 to 216,750.

A look ahead

This week’s release will include updates on the Institute for Supply Management’s manufacturing and nonmanufacturing indexes, construction spending, vehicle sales, factory orders, the Fed’s Beige Book report, nonfarm productivity, the trade balance, wholesale trade, consumer credit, and the jobless rate, which is expected to remain unchanged at 3.6 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.