MARKETS RETREAT AS CHINA DOMINATES THE NEWS

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Weekly Market Update — May 18, 2019

All the major U.S. equity markets retreated this week, as trade tensions between the U.S. and China ratcheted up dramatically
The small cap Russell 2000 lost the most, giving back 2.4%, while NASDAQ retreated 1.3%, the S&P 500 lost 0.8% and the DJIA dropped 0.7%
The benchmarks started out the week well amidst opportunity buying, but news toward the end of the week that China negotiations have stalled pushed stocks lower
Early in the week, China increased the tariff rate on $60 billion of U.S. imports to a range of 5–25%, effective June 1st
Mid–week, President Trump signed an executive order to protect U.S. technology from “foreign adversaries” that pose a threat to national security, which had China as its target for sure
U.S. Treasuries were all over the board – up some days and down other days – and yields generally finished lower on the week
The 2–year yield declined three basis points to 2.21% and the 10–year yield declined seven basis points to 2.39%
The U.S. Dollar Index increased 0.7% to 97.99
WTI crude rose 1.7% to $62.73/barrel just a week out from the start of the summer driving months
Volatility, as measured by the CBOE Volatility Index, spiked Monday but fell back as the week wore on

Weekly Market Performance

Stocks Moved a Lot This Week

Stocks witnessed a steep drop on Monday and then rallied most of the week's middle days before turning the other way to cap off the week.

Generally speaking, large–caps outperformed smaller–caps, and the 2.4% weekly drop in the small–cap Russell 2000 Index pushed it into correction territory as it is down more than 10% since August 2018.

Tariff Retaliations Dominate Market News and Action

U.S. and China trade worries dominated market sentiment. In fact, on the first day of trading following China's announcement that it was imposing an additional $60 billion in tariffs on the U.S., stocks turned in their worst day of 2019.

As one might expect, news of the new tariffs on the U.S., on the heels of President Trump's announcement the week before, hit companies that had exposure to China, including Apple, which dropped 6% because China is not only a huge market for Apple's products, but a lot of its products parts are made in China.

Tariff tensions eased a bit later on in the week when President Trump suggested that the countries would “make a deal when the time is right” and referred to the issue as a “little squabble.”

Remember that Brexit Thing?

Negotiations between the Conservative and Labour parties broke down again toward the end of the week, causing the British pound to drop more than 2% vs. the U.S. dollar.

In a nutshell, the Labour party said it would vote down Prime Minister Theresa May's Brexit deal and comes two weeks before another parliamentary vote on the UK's withdrawal from the European Union.

It should be noted that the U.S. has not initiated trade talks with the EU and just last year, Trump threatened to place 25% tariffs on car imports from the EU. But on Friday, Trump said he would hold off on the decision to slap tariffs on automobiles imported from Europe – as well as from Japan and other countries – for at least six months.

Sectors Continue to Rotate

The 11 S&P 500 sectors had a mixed week, with 7 of the 11 ending the week in the red. The worst performers were Financials (losing 2.1%), Industrials (down 1.9%), and Information Technology and Consumer Discretionary (which both dropped 1.1%).

The Real Estate (+1.4%) and Utilities (+1.2%) sectors led the ones painted green and they were joined by Consumer Staples (+0.9%) and Communication Services (+0.3%).

Looking longer term, it's interesting to note that:

For the 1–month period, 7 of the 11 sectors are in the red
For the 3–month period, 3 of the 11 sectors are in the red (Health Care, Energy and Industrials)
For the YTD period, 0 of the 11 sectors are in the red
For the 1–year period, 3 of the 11 sectors are in the red (Materials, Financials and Energy)
For the 3–year period, 2 of the 11 sectors are in the red (Communication Services and Energy)
For the 5–year period, 1 of the 11 sectors is in the red (Energy)

Economic Data

There was some good economic data and some not so good economic data, but most of it seemed overshadowed by the tariff back and forth anyway.

The Commerce Department reported that construction on new housing jumped 6% in April while building permits to build new houses went up 1%. Unfortunately, both numbers are behind last year's.
The Index of Consumer Sentiment surged in early May to its highest level in fifteen years. From the release Friday:
“Consumers viewed prospects for the overall economy much more favorably, with the economic outlook for the near and longer term reaching their highest levels since 2004. The gains were recorded mostly before the trade negotiations with China collapsed and China responded with their own tariffs.”
Retail sales dropped 0.2% last month, but are almost 3% above April 2018.
Non–store retailers were up 9% from April 2018, while sporting goods, hobby, musical instrument, and book stores were down 8.5% from last year.
Finally, the Department of Labor announced that jobless claims fell to a new five–decade low for the second consecutive week.

Sources

dol.gov; factset.com; sca.isr.umich.edu; statista.com.com; standardandpoors.com; nyse.com; bls.gov; sec.gov; census.gov; federalreserve.gov; msci.com; nasdaq.com; dowjones.com; morningstar.com; edwardjones.com; bloomberg.com