Stocks took a big hit in May as the trade war with China continued and a new one with Mexico seemed to come out of nowhere. The fear is that trade wars will hurt the U.S. economy over time.
As the bell rang to end the final round of the month, the Dow Jones Industrial Average finished at 24,815.04 - down a bruising 6.7% for May. The blue-chip index was down for 3% on the week for its sixth straight weekly decline - its longest such streak since 2011. The S&P 500 lost 6.6% on the month to close at 2,752.06. The NASDAQ ended the month at 7,453.15, for a monthly loss of 7.9%. The S&P 500 and NASDAQ were both down about 2 1/2% on the week.
The entire economic and financial universe has once again shrunk down to two variables: trade jitters and growth fears. This must be a real blessing for financial journalists and editors, as it allows them to file the entirety of their stock market coverage in just two possible headlines:
Stocks fall on trade jitters/growth fears.
Stocks rise on easing of trade jitters/growth fears.
It was a tough month, to say the least, as we succumb to the fears of a full-blown trade war with China (and now, surprisingly: Mexico). Without a doubt, the stressful global trade imbalances will play center court at the G-20 Osaka Summit coming later this month.
Where do we go from here?
The bears will point to the pervasive headwinds:
We broke through the 2800 support level and barely closed above 2750.
Oil prices dropped below $54 a barrel.
There is an inversion in the yield curve.
The bulls will look beyond the short-term horizon and focus on fundamentals:
Solid GDP growth for Q1.
High consumer confidence and a strong labor market.
Low inflation and low interest rates.
Today may not be the day to go "all in", but it's certainly not the time to "throw in the towel." This secular bull market has been fundamentally anchored in sound economic growth.
Fed officials will gather in Chicago tomorrow and Wednesday for a conference that will be closely watched in the aftermath of the May pullback. Traders are looking for any signs or comments that could suggest a fall rate cut.
In addition to the Chicago Fed conference, we have a full economic calendar to pay attention to this week. The highlight will surely be Friday's May jobs report. Today we get monthly auto sales and Institute for Supply Management manufacturing data. The international trade report due out Thursday will also be an important read.
While Wall Street remains cautious and concerned about trade, consumers appear to be upbeat, sensing widespread economic prosperity. This underscores the fact that the state of the economy does not necessarily correspond to the state of the stock market (and vice versa). For now, markets may very well remain beholden to volatility and uncertainty. We're seeing a pullback as a result of trade posturing. Of course, we will remain focused on fundamental data and the possibility that the Fed could come through with a rate cut this fall if they see any sign of an economic slowdown.
We'll likely learn more this week.
The week ahead, key economic data:
Monday: The Institute for Supply Management releases its latest factory purchasing manager index, which takes the pulse of the U.S. manufacturing sector.
Tuesday: Federal Reserve Chairman Jerome Powell speaks on monetary policy at the Federal Reserve Bank of Chicago.
Wednesday: Payroll giant ADP releases its May private-sector employment snapshot.
Friday: The Department of Labor presents its May employment report.
The week ahead, companies reporting earnings:
Tuesday: Cracker Barrel Old Country Store (CBRL), Salesforce (CRM)
Thursday: Beyond Meat (BYND), J.M. Smucker (SJM)
Have a good week! We are honored to serve you.
These are the views of FMG Marketing Library, and not necessarily those of Nick Toadvine, or Calton Associates, Inc., and should not be construed as investment advice. Neither Nick Toadvine nor Calton & Associates, Inc. gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.