June 27, 2019 Market Update for the Month Ending May 31, 2019
Markets Hit Turbulence in May
After four months of rising stock markets, we finally saw a decline in May. The S&P 500 declined by 6.35 percent, the Nasdaq Composite lost 7.79 percent, and the Dow Jones Industrial Average fell by 6.32 percent. Still, levels remain above where we were at the start of the year.
Declining confidence, not fundamentals, drove the pullback. According to FactSet, the first-quarter blended earnings growth rate for the S&P 500 stands at –0.4 percent. This result would represent the first quarter of year-over-year earnings declines since the second quarter of 2016. But it is better than the 4 percent drop forecast in March and the 2.3 percent drop expected at the start of May.
Technical factors were another story. All three major U.S. indices ended May below their 200-day moving averages. A prolonged dip below this line can indicate deteriorating investor sentiment and be a headwind for performance.
Global trade concerns also affected international markets. The MSCI EAFE Index fell by 4.80 percent, and the MSCI Emerging Markets Index declined by 7.22 percent. Both indices spent most of May below their trend lines, indicating that investors remain cautious about international investing.
Fixed income markets performed better. The 10-year Treasury fell from 2.52 percent to 2.22 percent. This drop led the Bloomberg Barclays U.S. Aggregate Bond Index to a gain of 1.78 percent.
High-yield fixed income had a challenging month. The Bloomberg Barclays U.S. Corporate High-Yield Index declined by 1.19 percent.
Economic Data a Mixed Bag
In May, we saw improvements in consumer sentiment and spending. We also saw lowered business optimism and investment amid trade concerns. Still, the economy continued to show growth.
Rising consumer confidence led to increased spending. The University of Michigan consumer confidence survey hit a 15-year high before moderating. Plus, the Conference Board’s measurement of consumer confidence showed improvement.
Solid employment results bolstered consumer sentiment. The 236,000 new jobs added in April drove the unemployment rate down to 3.6 percent. Wage growth showed a 3.2 percent year-over-year increase.
Personal spending rose by 0.3 percent in April. This increase was supported by 0.5 percent growth in personal income over the same period.
Businesses Feel Weight of the Trade Wars
Worries over trade wars with China and Mexico drove much of May’s negative data. The Institute for Supply Management (ISM) Manufacturing and Nonmanufacturing indices fell during the month. The ISM composite index of business sentiment also dropped to its lowest level since October 2016 (see Figure 1).
Figure 1. ISM Composite Index, May 2010–April 2019
Business investment also declined. Durable goods orders in April fell by 2.1 percent, due to a decline in aircraft purchases. Industrial production also disappointed. Lowered utility production and a drop in manufacturing led to an overall decline of 0.5 percent.
The trade deficit widened from $49.4 billion to $50 billion in March, driven by imports increasing faster than exports. Economists expect this deficit widened further in April, on slowed export growth due to the U.S.-China trade war.
Despite the trade-related headwinds in the business sector, improvement in spending should help support growth.
Economy Withstands Rising Political Risks
Political risks drove the instability across markets in May. The U.S.-China trade war and the announcement of a 5 percent tariff on Mexican goods were the main culprits.
Markets are now priced for more bad news. Trade uncertainties remain, but the fundamentals suggest growth will continue. This growth should support markets and provide the foundation for a recovery if trade tensions resolve.
Big Picture Remains Positive
Consumers are confident and willing to spend. Companies are expected to show improving fundamentals. Finally, markets are still positive year-to-date and remain above December lows.
There are risks, but the U.S. remains economically resilient and continues to show signs of growth. It is possible that May was just a bad month and not the beginning of a larger negative trend.
As always, a well-diversified portfolio and a long-term view toward investing remain the best way to meet financial goals in an unpredictable world.
All information according to Bloomberg, unless stated otherwise.
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.
Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, and Sam Millette, fixed income analyst, at Commonwealth Financial Network®.
© 2019 Commonwealth Financial Network®