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May 2019 Market Recap: Stocks Hammered as Trade War Persists

After four consecutive months of rising stock prices, the market finally stumbled in May – along with bond yields and oil prices – as concerns mounted over the lingering trade war between the U.S. and China – and now, potentially, Mexico.

Image 1

The S&P 500® dropped 6.58% in May, capped off by a final jolt on the last day of the month when the administration raised the possibility of imposing new tariffs on Mexico. Despite the May slump, the S&P 500 is still up 9.78% for the year. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)

The NASDAQ Index followed suit, dropping 7.93% for the month after posting a 22% gain through the first four months of the year. (The NASDAQ Index – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)

International stocks were also drawn into the downdraft, as the MSCI EAFE Index, which tracks the performance of developed-economy stocks in Europe, Asia and Australia, dropped 5.42% for the month.

Exhibit 1

Here are some recent economic highlights, many of which are covered in greater detail later in this report (Exhibit 1):

  • Consumer spending rises. Personal consumption expenditures (consumer spending) rose 0.3% in April, according to a Department of Commerce report issued May 31. This exceeded consensus forecasts of 0.2% growth.
  • Retail sales slip. Retail sales for April were down 0.2% from the previous month versus expectations for a 0.2% gain, according to the Department of Commerce.
  • Job gains continue. The economy added 263,000 new jobs in April, as the unemployment rate dropped to just 3.6% – the lowest level since 1969. Estimates had been for 190,000 new jobs and an unemployment rate of 3.8%.
  • Bond yields sink. Yields on 10-year U.S. Treasuries dropped to the lowest rate since 2017, ending May at 2.14%.
  • Oil prices skid. After a long stretch of rising prices, oil prices dropped sharply in May amidst global economic concerns and rising U.S. production.

Drilling Down

U.S. stocks slammed

Rattled by trade and economic concerns, the S&P 500 dropped 6.58% in May, from 2,945.83 at the end of April to 2,752.06 at the May close.

Exhibit 2

The total return of the S&P 500 (including dividends) was -6.35% in May (Exhibit 2). It is up 10.74% for all of 2019.

The NASDAQ Index was also down for the month, from 8,095.39 at the end of April to 7,453.15 at the May close – a loss of 7.93%. For the year, the NASDAQ is still up 12.33%.

Personal income and spending both rise

Personal income1 increased by 0.5% in April, according to the Department of Commerce in a May 31 report. Disposable personal income2 rose by 0.4%, and personal consumption expenditures3 increased by 0.3%.

Retail sales dip

Despite the increase in consumer spending, retail sales for April were down 0.2% from the previous month versus expectations for a 0.2% gain, according to the Department of Commerce in a May 15 report. Sales were up 2.8% from a year earlier.

Although most categories were down slightly from the previous month, many areas showed gains versus a year earlier. Motor vehicle sales were up 2.2% from a year ago, building materials were up 1.2%, non-store retailers (primarily online) were up 9.0%, and food and drinking places were up 5.7%. Electronics and appliance stores were down 1.3% from the previous month and down 4.3% from a year earlier.

Unemployment rate lowest in 50 years

U.S. employers added 263,000 new jobs in April, and the unemployment rate declined to 3.6%, the lowest rate since 1969, according to the U.S. Bureau of Labor Statistics Employment Situation Report issued May 3. Estimates had been for 190,000 new jobs and an unemployment rate of 3.8%.

The economy has added jobs for 103 consecutive months.

Average hourly earnings increased by $0.06 for the month to $27.77. Over the past 12 months, wages have increased 3.2%.

Exhibit 3

Almost all sectors down for the month

Ten of the 11 sectors of the S&P 500 lost ground in May. Real Estate was the only sector with a gain for the month, up 1.16%. Energy, Information Technology and Materials experienced the biggest losses.

Exhibit 3 shows the results of the 11 sectors for the past month and all of 2019.

Treasury yields drop

The yield on 10-year U.S. Treasuries fell in May to the lowest level since September 2017, ending the month at 2.14% (Exhibit 4).Exhibit 4 The decline in yields was attributed to a higher demand for safe long-term bonds as fears of global economic weakness increased amidst the escalating trade war between the U.S. and China. The yield dropped 0.36% from the April close of 2.50%.

Oil prices fall

After four strong months, oil prices plunged 16.29% in May, due largely to rising U.S. production,Exhibit 5 higher-than-expected inventories, and global economic concerns (Exhibit 5). The price of a barrel of West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, dropped from $63.91 at the April close to $53.50 at the end of May.

International equities sink

The international equity markets were down in May, mirroring the slide in the U.S. market.Exhibit 6 The MSCI EAFE Index was down 5.42% in May, from 1921.49 at the April close to 1817.39 at the end of May (Exhibit 6). It is still up 5.67% for the year.

What’s ahead for the economy and the markets? See June 2019 Market Outlook: Does Wide Disparity in Sector Valuations Spell Opportunity? by Darren Bagwell, CFA, Chief Equity Strategist

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