ND&S Weekly 5.20.19 – Stay Calm

May 20, 2019

The equity markets were a bouncing ball last week as continuing trade tensions weighed down the Dow Jones Industrials (DJIA) for a fourth straight week of losses, its longest losing streak in three years. The DJIA shed 0.61%, the S&P 500 declined 0.69% and the NASDAQ gave up 1.22%. US small caps suffered with the Russell 2000 losing 2.32%. Emerging market stocks fell 3.55% while developed international equities squeezed out a 0.23% gain.

The increasingly rancorous trade conflict has made investors nervous about the two economic powers damaging global supply lines and putting the brakes on an already slowing global economy. However, there was a positive trade development with the US lifting tariffs on Canadian and Mexican steel and aluminum.

It is important to note that corporate earnings fuel stock prices. With first-quarter earnings season almost over, 460 constituents of the S&P 500 companies have reported and 75% of them beat analyst expectations. The impact of trade conflicts will be on center stage again as large retailers, Home Depot, Nordstrom, Kohls, and Target report this week. According to the American Apparel and Footwear Association, 41% of apparel and 72% of footwear produced is manufactured in China.

Economists, analysts, and market pundits are recalibrating their data. Investors, meanwhile, have sought safe-haven assets as US Treasury yields fell, money market inflows surged and utility and telecommunication stocks rose. Overall yields on US Treasuries fell to their lowest levels in over a year. The benchmark 10 year US Treasury yield closed the week at 2.39%, down from 2.47% the week prior.

Though we expect President Trump tweeting about trade and China’s bellicosity to continue, Wall Street consensus is that there will be a trade deal with China. In another escalation with China last week, the US put Chinese hardware company Huawei and 26 of its affiliates on an export blacklist causing a number of US tech giants to halt business with them. The US and others have accused Huawei of committing espionage on behalf of the Chinese government. Hopefully, President Trump and Xi Jinping can settle things at the end of next month at the meeting of the Group of 20 nations. There are other geopolitical risks to take into account including, escalating tensions with Iran, Venezuela’s instability, Europe’s parliamentary elections and North Korean missile launches.

Economic news in the week ahead include reports on new and existing home sales, manufacturing PMIs, and durable goods orders. Despite all of the headline news we strongly feel that investors should remain diversified, not chase the momentum up or down and try to stay calm.

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” – Winston Churchill