Trade Dispute with China Dominates Markets
The trade dispute with China dominated markets during the week, beginning with President Trump’s Sunday night tweet announcing plans to levy additional tariffs on Chinese goods. The Chinese responded in kind, threatening tariffs of their own. The markets were surprised when no agreement was reached and traded down for most of the week before recovering slightly on Friday even as the next round of tariffs went into effect.
On a more optimistic note, earnings season is coming to a close having averted a predicted “earnings recession.” Earnings for the S&P 500 climbed 1.8% in 1Q, well ahead of the -3.0% that was projected. Almost every sector had better growth than was anticipated, according to S&P, with sales up 5.1% on average.
But China was the story and will continue to be until a resolution is found to the trade dispute. As a practical matter, it will be a few weeks before the tariffs take effect as goods now being shipped reach U.S. shores so there’s time for more negotiations to take place. We continue to believe that it’s in the interest of both sides to reach some sort of compromise.
Other big news during the week included the much-anticipated Uber initial public offering on Friday. The stock came out at $45/share but closed the day down, at $41.57.
GAIN: Active Asset Allocation
It was a challenging week for stocks, especially in China and the emerging markets. The S&P 500 fell -2.0%, and international stocks declined -3.0%, according to the MSCI All World ex-U.S. Index. China itself dropped -6.5% as measured by the FTSE China 50. In Europe, there was red across the board, with the MSCI Europe Index down -2.7%.
The U.S. market has held up reasonably well through all this and the fundamentals appear to still be sound. The U.S. Federal Reserve continued to sit on the sidelines on rates, with no further upward moves likely while the trade dispute goes on.
For its part, China initially refrained from retaliating on the tariff front, but on Monday it announced levies of its own on $60 billion worth of U.S. goods. Domestically, China is starting to see the stimulus it put into place 11 months ago work its way through into the real economy, providing support for growth (assuming it’s not derailed by the trade issue).
PROTECT: Risk Assist
We didn’t believe that volatility would stay quiet forever, and it didn’t. The CBOE VIX index woke up during the week, topping 19 on Thursday, its highest level since January 4th, before settling back down to around 16 on Friday as the stock market experienced a modest rally.
Broad US and Global markets are now down about 5% each off of their 1-year highs after last week’s pullback.
SPEND: Real Spend
The Producer Price Index (PPI) came out for April, showing a modest 0.2% rise, down from 0.6% the month before. On an annualized basis the PPI climbed 2.2%. The Consumer Price Index (CPI) was out on Friday, and the headline number was up 2.0%, year-over-year, a data point which should relieve deflationary expectations a bit.
Global stocks were down -2.5% on the week, while investment grade bonds returned 0.3%. The one-year spread between global stocks and bonds has stocks up 1.2% and bonds up 5.6%. Year to date, global stocks are still well ahead, up 13.6% compared to 3.1% for global bonds. U.S. stocks are outpacing bonds YTD as well, up 15.8% compared to 5.6%.
The equity yield space outperformed with MLPs up 2.1% and US REITs declining less than the market at -0.9%. U.S. dividend stocks were the worst performer of the group, down over -1.9% but still ahead of the broad markets.
Long-term U.S. treasuries rallied on a flight to safety, up 0.9% as the yield on the 10-year fell four basis points to 2.53%. Convertible bonds were the worst performers, down -2.5%. High yield bond spreads widened.
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