Market Monitor: May Update
Twice a month, we send clients this overview of the markets and roundup of key economic news stories. Similar to Altair Insight, it enables us to share our big-picture views while also highlighting select market returns and developments that we feel are important.
Headlines and Highlights
- U.S. raises tariffs with China, threatens new ones with Mexico: President Trump increased the tariffs on $200 billion of Chinese imports to 25% from 10% and began the process for an additional $325 billion after trade talks faltered in the late stages. Adding uncertainty to markets was Trump’s announcement that he would impose a 5% tariff starting June 10th on all Mexican imports, a rate he said would steadily increase throughout the summer if illegal immigration does not lessen. China responded with similar tariffs and Mexico said it was exploring possible retaliation, although both countries signaled a willingness to negotiate with Washington.
- Markets roiled by trade-war escalation: The ratcheting up of the trade war between the world’s two largest economies triggered a pullback in global stocks, eroding a portion of the healthy 2019 gains. After ending April at a record high, the Standard & Poor’s 500 fell 6.3% in May in its biggest monthly decline since December. Benchmarks for international developed stocks (-5.0%), emerging-market stocks (-7.3%) and commodities (-4.3%) all declined while taxable bonds (1.8%), municipal bonds (1.2%) and U.S. REITs (+0.1%) gained.
- Global bond yields drop: Growing concern about international trade prompted many investors to shed stocks for more conservative holdings, igniting a rally in bonds that drove the 10-year Treasury note to its lowest level (2.1%) since 2017. Part of the U.S. Treasury yield curve inverted when the 10-year yield fell below that of the three-month bill (2.3%), historically a predictor of a recession within the next 18 months. The decline in bond yields across major developed markets also accelerated, with Germany and Japan among those with negative yields on government 10-year bonds.
Selected Market Returns
Sources: Morningstar, Altair Advisers
- Prospects for a trade war agreement between the United States and China have ebbed and we now think the conflict could last months longer. While near-term risks have risen, we still believe President Trump will make a concerted push for a deal before allowing either a stock slump or recession to jeopardize his reelection chances in 2020.
- The U.S. economy remains healthy and we believe for now that it can withstand any additional pressure from higher tariffs without falling into a recession in 2019. The labor market is historically strong, recent gains in productivity are encouraging, inflation is tepid and consumer confidence remains high. We are prepared to reduce exposure to risky assets if key indicators begin pointing to a lasting economic downturn.
- The inversion of a slice of the yield curve since late May, while concerning, does not in and of itself signal a coming recession, especially given multiple other indicators showing a still-solid economy. An equally important part of the curve, the 10-year/two-year spread, remains little-changed and has not inverted. Economic conditions today also are different from past cases when recessions soon followed inversions, especially given the extent of the Fed’s quantitative easing program.
- The Federal Reserve should react to any meaningful changes in economic fundamentals in determining when and how to next revise the target range for its benchmark interest rate. A rate cut would reflect concerns about the state of the economy, although it could help limit the extent of any market downturn. While the market is predicting two rate cuts by year’s end, we think that is unlikely given the current data.
The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice