Portfolio & Market Review: May 2019
The strong market rally of 2019 came to a screeching halt in May as investors dealt with renewed worries of an escalating trade war between the US and China. Global equites sold off sharply during the month, down more than 6%, and global bonds rallied, up over 1.4%, in response to an uptick in geopolitical risk. Just six days into the month, President Trump announced that the US would raise tariffs from 10% to 25% on $200 billion of Chinese imports and threatened to levy additional tariffs on the remaining $300 billion of untaxed imports. The Chinese administration quickly fired back by increasing its own tariffs on US imports and making a strong statement that the administration is prepared for “a modern Long March.” To make matters worse, President Trump made a separate statement that the US would impose tariffs of 5% on Mexican imports as a result of what he terms “passive cooperation” from the Mexican government with a recent surge in illegal immigration.
In the US, the S&P 500 index finished the month down 6.4%. Economic data on the month was largely mixed as consumer confidence and employment remain healthy, but retail sales, industrial production, and durable goods showed signs of weakness. The technology, energy, and industrial sectors were among the worst performers, while the typical defensive sectors, utilities, healthcare, and consumer staples, provided stability.
Equities outside the US were duly affected by the increasing trade tensions. Stocks in the Eurozone fell 6.4% as industries most sensitive to global trade (e.g. autos and semiconductors) suffered the most. While Q1 GDP in Germany showed the country narrowly avoided a recession, data throughout the region continues to trend in the wrong direction, increasing growth worries and providing added headwinds to equity returns.
Emerging markets fell 7% led by Eastern Asian markets (China, Taiwan, Korea). Chinese stocks fared the worst amid the deepening trade conflict and weaker-than-expected economic data for April. Industrial production growth fell to 5.4%, from 8.5% in March and retail sales rose at the slowest pace in 16 years. A lone bright spot in an otherwise dim month for emerging market equities was India. Indian stocks outperformed as the market responded positively to the conclusion of its six-week election process. Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) won an absolute majority in the lower house, providing additional clarity to both policy and long-term growth outlooks.
The selloff in global equities was accompanied by a rally in global bonds. The benchmark 10-year US Treasury yield fell by .38% finishing the month close to 2.17%, a level not seen since mid-2017. The difference between 10-year and three-month US Treasury yields again fell below zero. This inversion in the yield curve (longer maturity yields are usually higher than shorter maturity yields) indicates that bond investors have a negative view of the economic outlook. The reemergence of the inverted yield curve in the US continues to garner attention and speculation about near-term recession risk.
The impact of trade negotiations between the US and China has, so far, been felt more in the equity markets than in the economy. However, if these talks continue to drag out, and if the imposed tariffs become more severe, the economy is likely to be impacted. The sharp move in Treasury yields reflects this sentiment, as the bond market is now pricing in expectations of further easing by the Federal Reserve (Fed) with three .25% rate cuts by the end of 2020.
In general, the global economy is losing steam as news flow over the course of May was mostly negative. As we enter the later stages of the current 10+ year expansion, investors would be wise to temper return expectations. The market activity in May should serve as a reminder that there are two-way risks to both growth and markets, thus supporting the argument to maintain a diversified portfolio of both stocks and bonds appropriate for one’s specific individual financial circumstances.
Model Portfolio Update
There were no model changes made.