The Markets – The S&P 500 index fell 6.6% in May, the Dow -5.67% for the month and the NASDAQ finished the month -7.26% according to the Wall Street Journal. The US Core Bond market gained 2.83% in May, dropping yields a whopping 18% on the 2 year Treasury note as investors fly to safety according to Morningstar.
U.S. companies have been spewing their downside guidance, blaming the trade wars. Whether or not the income from tariffs is truly an offset for slack in demand, the most damaging effect of the trade wars is uncertainty. Many of the CEO’s of the largest U. S. companies cite a lack of visibility in providing meaningful forward guidance due to the trade wars. The numbers don’t lie; exports were $5.9 billion less than March exports while imports were $5.6 billion less than March imports. All this does not paint a pretty picture for equity markets heading into the 2nd half of 2019.
Trade Wars: Trade rhetoric out of China remains negative. The decline in oil prices is also reflective of lingering concerns that slower growth will weaken – end demand. There is no way to deny, industrial demand for crude oil has weakened due to slack caused by the trade war. There is some concern that that China and the U.S.A. will find other trade partners and after the trade-war subsides, trade between the two nations will not recover to pre-tariff levels. There is a real concern China will purchase Iranian oil sending a message to the U.S.A. that they are focusing on other trade partners. Coupled with slower demand, possibly loosing China purchases, and new pipelines coming on line here in the U.S. the outlook for WTI pricing does not look good.
Overseas: All eyes are on Brexit where President Trump has already seemingly indorsed a replacement for Theresa May, who is due to step down as Britain’s Prime Minister within weeks over her inability to broker an exit plan from the European Union. President Trump is urging Britain to walk away from any deal they do not feel is a good one, and not pay Europe the divorce bill. The relationship between Britain and the U.S. could strengthen due to a reliance on each other over both the China/US rift and the Britain/EU rift.
Fed Watch: Polls reflect most traders now expect the Fed to lower rates at least once this year and 3 times next year. A far cry from December when most expected rates to rise 3 times in 2019.
Have a question? Let me know! Email me at kcompton@wsmtexas.com.