May Market Commentary

US stocks sank in May on global trade tensions.  After being dissatisfied with current negotiations, President Trump announced the US would raise tariffs on $200 billion of Chinese goods to 25% from the previous 10% level.  He also said he would impose levies of 25% this summer on $325 billion of Chinese goods that have yet to be taxed.  In addition, he signed an executive order that would ban telecommunications equipment from “foreign adversaries.”  The move would significantly impact several Chinese companies.  Finally, Trump threatened 5% tariffs on all Mexican goods beginning June 10th that would grow to 25% in October if the country doesn’t do more to stop the flow of immigrants into the US.  With nearly all S&P 500 companies reporting first quarter earnings results, 76% have beat analysts’ forecasts, and profit contracted 0.4% from a year earlier, less than the 4% analysts had expected.  Economic news was mixed over the month with 253,000 new hires in April and the unemployment rate dropping to 3.6%, its the lowest level since 1969. Both readings topped expectations.  Consumer sentiment reached its highest level since 2004.  On the downside, factory activity eased, retail sales fell, existing home sales posted their 14th straight month of annual declines, durable goods orders plunged and first quarter Gross Domestic Product (GDP) was revised down from 3.2% to 3.1%.  Oil prices fell 16.3% in May to their lowest level in three months, ending at $53.50 a barrel.  In May, US stocks plunged 6.47%, but are still up 10.92% for the year to date.

Foreign stocks slumped as trade worries dominated.  China retaliated against US tariffs with plans to increase tariffs on $60 billion of US goods.  Data showed that retail sales, fixed asset investment and industrial production all cooled in China in April.  An engine of growth for much of the recent expansion, Germany only grew at 0.4% pace in the first quarter.  At the end of the month yields on German bunds hit an all-time low.  However, the European Central Bank said they believe “the economic recovery in euro area has been delayed not derailed.”  UK prime Minister May abruptly announced her resignation as she failed to reach an agreement to take the UK out of the European Union.  Emerging markets trailed developed markets in May and for the year to date.  International stocks fell 5.15% in May, but still have gained 7.37% so far in 2019.

Bonds surged in May as interest rates reached their lowest level since 2017.  Fears of a global recession driven by trade tensions sent investors to safe haven investments.  At the conclusion of the Fed’s May meeting they signaled that they don’t foresee making any changes to the Fed Funds rate for some time, continuing to take a wait and see approach.  Core inflation has been below their 2% target, spurring some investors to think a rate cut could be on the horizon, however, the Fed believes that the inflation soft patch is temporary.  The 10-year Treasury yield fell to finish the month at 2.14% down from 2.50% to start May. It was the largest one-month yield decline since 2015.  For the month, government bonds were the top performing sector and longer-term bonds topped shorter-term bonds.  The broad bond market jumped 1.78% in May and has gained 4.80% for the year to date.