As good as the first third of the year was for stock market investors the month of May was just as bad, giving back a large chunk of the gains made earlier this year as global markets sold off. All the indexes we follow gave back at least 6% for the month. The “risk off” trade was not limited to the stock market as the CRB commodities index dropped more than 5%. The safe haven bond index reaped the benefit with a large monthly increase. The US dollar was modestly stronger.
U.S. & International Stock Index Returns |
| Total Returns |
| Index May 2019 Year-to-Date |
| Dow Industrials (7.62%) 6.38% |
| S&P 500 (7.73%) 9.78% |
| S&P 400 (Midcap) (9.63%) 8.87% |
| S&P 600 (Small Cap) (10.22%) 5.18% |
| MSCI World (7.03%) 8.62% |
| MSCI EAFE (6.05%) 5.67% |
| Bloomberg Agg. Bond 4.80% |
| CRB Commodity Index 3.28% |
| US Dollar Index 1.54% |
All data as of 05/31/2019, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
Stock Market
Something changed for equity investors as the major indices suffered large losses for the month. The selling was across the board, effecting companies large and small, domestic and international. In our April 2019 report we noted that the indexes were being powered higher by fewer and fewer stocks. With earnings prospects positive for the second half of 2019 we were looking for some follow through from the small and mid-cap markets.
That follow through never martialized. Instead of the small and mid-cap indexes catching a bid higher, the large cap indices fell almost continuously, right to the end of the month. Fundamentally we saw no real change in outlook for earnings. Instead, trade issues have been front-and-center for market participants. The now very real possibility of a deeper level of trade war with China has been compounded by the threat of Mexican imports being slapped with a 5% tariff starting on June 10th.
Bond Market
In response to global trade tensions investment assets from both home and abroad have been flowing into the US Treasury market. This risk off trade is reflected in the acceleration for the downtrend of the 10-year Treasury yield, which ended the month at 2.14%. The Bloomberg Barclays Aggregate Bond Index is now up 4.80% for the year. This is a big move and reflects the skittishness investors are having right now.
Currencies
After a strong gain in April the US Dollar Index was slightly positive with a 0.20% gain for the month.
Commodities
The CRB Commodities Index took a big hit this past month, losing 5.23%. Oil was a major factor as market participants sold on concerns surrounding global trade and increased reserves. Gold (Chart #6), on the other hand, has been a beacon of strength for many of the same reasons.
Looking Ahead
There are some months when writing the Looking Ahead section is amazingly easy as the ideas and words just jump onto the paper. There are other months where we know what we want to say but struggle with the verbiage to effectively get our point of view across to you, our reader. The difference between the two scenarios is not a matter of point of view – because we ALWAYS have an opinion on the markets – but in expressing said opinion. Today we are in a much different situation. Today we are in unchartered territory. Today we have an opinion but a concern about the safety of having an opinion as the investment landscape is in a very strange place.
As we enter June the economy is good, the jobs numbers have been fantastic, and people appear to be generally happy with their situation. Sure, most everyone would like to have more earnings – from work or investment – but isn’t that always the case? On the investment side, the bull market for stocks has been going on since 2009 with just a few short periods where the market sold off. The most recent experience was the fourth quarter of 2018. Overall things seem really good. Yet all is not well.
When you look just a bit under the surface it becomes obvious (to us) that there are a lot of things moving in the wrong direction. From a technical perspective, things are a bit of a mess. As we mentioned earlier the small and mid-cap indexes are below their respective 200 day moving averages, as are 50% of individual stocks (when above the 200DMA a market is bullish, below it is bearish). The retail sector index and many large technology stocks are breaking down. Bonds have been surging as yields have moved precipitously lower. Oil prices have lagged. All of THAT is negative.
But then there’s this: trade concerns. Up until the end of May China was the main concern. What changed is the May 30th threat of new tariffs on imported goods from Mexico related to a dispute over immigration (details can be found here). They may take effect starting on June 10th before increasing at the beginning of every month through October. Or not. President Trump could say all is good and not tariffs, or Congress could pass legislation with veto-proof majorities to override his threat. In our opinion we are in unchartered territory here with out largest trading partner as Congress is being asked to ratify the USMCA trade deal that was negotiated last year.
At the end of the day the stock market moves based on corporate earnings. Fundamentally earnings for the first quarter came in generally as expected with projections for the second half of the year still looking robust. Those are projections, not hard numbers, but it does reflect a general positive vibe for the future. What happens with this immigration/trade dispute could easily keep reality from reaching the forecasted numbers.
A tariff is a tax, one that is paid by the importer. The cost of said tax will be absorbed by either a cut in price by the Mexican producer (in many cases a US-based corporation), eating the cost by the importer (less profit), or a passing along of the cost to the consumer (higher prices/inflation). In any scenario the effect is negative: Higher corporate costs lead to lower profits; Higher consumer costs lead to less sales and lower corporate profits.
Markets do not like uncertainty and neither do we. There are reasons to be bullish but less than before, and with a tariff cloud hanging over the markets. The swift move lower in bond yields has been telling us the bond market is concerned. Lower commodity prices are a tell for lower global economic growth. Because of this we have become notably cautious on the stock market. We want to believe everything will be just fine, yet, we cannot find a compelling reason amid the uncertainty. While admittedly our cause for caution could be wrong in retrospect, as prudent risk managers we would rather be cautious and wrong then boldly bullish and wrong.
On behalf of Magellan Financial we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it on to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
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Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
Jeffrey T. Bogert, Partner
Jonathan D. Soden, Partner Jon.Soden@wfafinet.com
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