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Financial Markets Commentary For the week of June 10, 2019

Key Market Data

05/31/2019 06/07/2019 One Week Change YTD One Year
S&P 500 Index 2,752.06 2,873.34 +4.41% +15.68% +5.82%
MSCI EAFE Index 1,817.39 1,875.62 +3.20% +11.57% -3.84%
Barclays Capital U.S. Aggregate Bond Index 2,144.78 2,152.48 +0.36% +5.17% +7.37%
10-year Treasury Note Rate 2.125% 2.083% -4.2 basis points -60.2 basis points -83.8 basis points

Despite the threat of a crippling trade war with Mexico and a sub-par jobs report, the stock market just had its best week of 2019. Why? Because investors became convinced that the Federal Reserve, which began the year poised to raise its benchmark rate, was now all but certain to cut it. How good a week was it? The Dow, which had been down for six weeks straight, soared 1,168.9 points, gaining 4.7 percent, all but erasing May’s losses. The S&P 500, up for the first time in five weeks, gained 4.4 percent, its best showing since last November. And the Nasdaq, which had been in the black for four weeks in a row, jumped 3.9 percent. At the same time, bond yields continued their recent decline, with the yield on the ten-year Treasury dropping to 2.083 percent on Friday, the lowest level since September of 2017.

The stock market’s surge began in earnest on Tuesday after Jerome Powell, the Chairman of the Fed, was seen as endorsing a rate cut because of the slowing global economy — though he didn’t explicitly say so. Speaking in Chicago, he said the Fed was “closely monitoring” the state of the economy, adding the key words, “We will act as appropriate to sustain the expansion.” This came a day after James Bullard, the President of the Federal Reserve Bank of St. Louis, was more direct, saying a cut “may be warranted soon.” By the end of the day on Tuesday, the Dow had soared 512.40 points — and all three indexes were off and running for the week.

One trade war averted …

The market’s upswing came against the backdrop of a new trade war with Mexico that most analysts, and many congressmen, feared would be devastating to the U.S. economy. President Trump had threatened to impose tariffs that could rise as high as 25 percent on Mexican imports, around $350 billion in 2018. The president wanted Mexico’s government to act to stem the rising flow of immigrants who cross the border illegally. After the stock market closed on Friday, the two nations reached an agreement on heightened security and the president cancelled the first tariff, which was scheduled to start today. Most of the steps announced had been previously agreed to, but the U.S. added a new condition saying it would review the progress, and reconsider tariffs, after 90 days.

… another war still brewing

Meanwhile, there’s still rising global concern about the impact of the trade war being waged with China. For instance, the World Bank lowered its forecast for global growth from January’s 2.9 percent to 2.6 percent. President David Malpass said, “There’s been a tumble in business confidence, a deepening slowdown in global trade, and sluggish investment in emerging and developing economies.” Later in the week Christine Lagarde, the Managing Director of the International Monetary Fund, blogged about the trade war, saying, “these are self-inflicted wounds that must be avoided.”

On Saturday, Treasury Secretary Steven Mnuchin met with Yi Gang, President of the People’s Bank of China, in Japan at the G-20 meeting for finance ministers and central bankers. It was the first time the two sides had met since talks stalled a month ago, and Mnuchin said he and Yi had a “candid discussion.” President Trump and China’s President Xi Jinping are expected to talk when the meeting of the G-20’s leaders takes place in Japan later this month, though China has yet to confirm the session.

A sub-par jobs report

Investors also shrugged off Friday’s unemployment report, with the economy only adding 75,000 jobs in May compared to the estimate of 175,000. The report was seen as further impetus for a rate cut (the CME Group now says there’s a 25 percent of a rate cut when the Fed meets in June and an 87 percent chance when it convenes in July). In addition, the number of jobs created in March and April was revised down by 75,000, bringing the monthly average for 2019 down to 164,000 compared to 223,000 in 2018. On the plus side, the household jobless rate remained at 3.6 percent, a 50-year low. The labor force participation rate was also unchanged at 62.8 percent. Wages were up 0.2 percent from April and 3.1 percent for the year.

Tech trouble

The stocks of some of tech’s biggest names — Apple, Alphabet, Facebook, and Amazon — tumbled early last week after news that the government would be investigating the companies for potential antitrust violations. As a result, the Nasdaq fell briefly into a correction — down 10 percent from a recent high. Big tech was in for more bad news at the end of the week when China summoned a dozen leading companies, including Microsoft, Dell, and Qualcomm, to tell them that there would be repercussions if they complied with the new U.S. trade restrictions on technology exchanges.

One merger derailed, and another unveiled

The merger between Fiat Chrysler and Renault announced the week before last fell apart, apparently because of the interference of the French government which owns a 15 percent stake in Renault. On Sunday, two aerospace giants, United Technologies and Raytheon, announced a potential merger that would create a $166 billion company. In other news, the Institute for Supply Management’s manufacturing index fell from April’s 52.8 to 52.1 in May, the lowest reading since October of 2016. Even though the number dropped, it’s still above 50, which indicates expansion. The ISM’s nonmanufacturing index was up to 56.9 in May from 55.5 in April. The U.S. trade deficit declined 2.1 percent to $50.8 billion in April from March while the deficit with China jumped 29.7 percent to $26.9 billion. Oil prices slumped into bear territory last week for the third time since 2017 because of fears of the global slowdown, down 20 percent from a recent high. By week’s end, U.S. crude was off 19 percent from April’s $66 peak but still up 19 percent for 2019. Orders for factory goods fell 0.8 percent in April from March, the biggest month-over-month drop in two years. Wholesale inventories were up 0.8 percent in April from March. Construction spending was flat in April from the month before. And first-time jobless claims for the week ending June 1st were unchanged at 218,000; the four-week moving average fell 2,500 to 215,000.

A look ahead

This week’s releases will include the latest on job openings, small business optimism, the producer and consumer price indexes, retail sales, industrial production and capacity utilization, business inventories, and consumer sentiment.

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.