Stocks retreated in May while bond yields fell to new lows for the year. After several months of optimism for a trade deal, the US and China appear no closer to reaching a deal than they were at the end of last year. With revamped trade tensions at the forefront, global stocks retreated 5.9%. Worries that growth is slowing sent the 10-year Treasury bond yield down to 2.14%. Despite these concerns, global stocks are still holding on to solid gains for the year.
Large-cap stocks in the S&P 500 declined 6.4% in May while small and mid-sized companies registered losses of 7.8% and 6.1%, respectively. Developed international stocks fell 4.4%.
Most estimates of the impact of reduced trade on GDP are modest and unlikely to cause significant economic contraction. However, the ongoing effects on business and consumer sentiment are most worrisome. Could the psychological impact of an unresolved trade war instigate a recession?
A new front on the trade war opened with the announcement of tariffs on Mexico to combat immigration flows. The first use of tariffs for non-trade reasons created fresh concerns in the financial markets. Most felt North American trade issues had been resolved.
There are few if any historical precedents for what happens next. The markets are better at discounting known risks than ones where history is of little help. Regardless, it looks like beer and guacamole just got more expensive.
Amid all this uncertainty, interest rates declined, and longer-term bond yields fell further below yields on short-term bonds, a rate inversion that has proved problematic in past cycles. The bond market now expects the Fed to shift course and is pricing in two rate cuts by year-end.
What Is Working
No doubt, it was a bad month for stocks. It was one of those months that balanced portfolio investors were happy to have some safe-haven assets to offset the weakness in volatile stocks.
Prices of intermediate and long treasury bonds rallied as rates declined. The 10-year Treasury yield fell to 2.14% after touching 3.2% just last November.
Treasuries, still regarded as the highest quality bonds, have a long history of positive returns when stock prices decline. This usually has to do with the economic drivers. When growth and inflation are expected to fall, that’s when Treasury yields rally. When inflation concerns seem to be getting away from the Fed, Treasuries may not provide the ballast for stock market volatility.
Our bond portfolio strategies continue to focus on high quality assets, with Treasury securities playing an important role in portfolios as shock absorbers for stocks.
International stocks outperformed domestic stocks this month. Sentiment has been poor for international stocks for some time for a number of reasons: trade, Brexit, and stubbornly low growth. Of course, it’s not at all clear how greater protectionism will impact international markets. China may lose at their neighbors’ gain. Everyone loses to some extent. Looser trade ties may also result in greater diversification benefits for investors.
What It All Means
Despite May’s pullback, stocks still remain in positive territory this year, with global stocks up 9.1% for the year. If this holds, that would put 2019 near the historical averages. The near term always feels uncertain, and right now is no different. What worries the markets are the same issues we have been dealing with for some time now.
Sticking with a plan that works for you is always a challenge in the face of market volatility.
We are always happy to discuss your goals and evaluate your investment strategy.
Contact us at 865-584-1850 or info@proffittgoodson.com