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Market Commentary

Stocks down in May on trade but
Fed rate cut expectations spark June rally

June 2019

After a torrid Q1 and solid start to Q2, with the S&P 500 and Nasdaq hitting new all-time highs in late April fueled largely by the Fed pivot on interest rates and monetary policy, market sentiment turned south in May. Despite some bumps and inconsistent rhetoric, the baseline assumption was that a trade agreement between the US and China was progressing well and imminent as early as spring. These expectations also contributed to the market's strong start and sharp rebound from Q4, as it lessened slowing global growth concerns.

That optimism faded quickly in May as trade negotiations broke down when China backed away from some key agreements nearing the finish line and worsened when President Trump announced US tariffs would increase from 10% to 25% on $200 billion of imports effective May 10th. China responded with tariffs on an additional $60 billion of US imports effective June 1. These events, as well as a surprise announcement of a 5% tariff on imports from Mexico by President Trump on May 30, relating to illegal immigration, unnerved the global markets further and stocks finished with broad losses in May.


May Re-Cap

  • Benchmark S&P 500 and the Dow fell 6.6% and 6.5%, respectively
  • Nasdaq and Russell 2000 each lost 7.9%, while Mid-Caps fell 8.1%
  • Foreign markets felt the trade war pressure with the MSCI EAFE losing 5.4% and Emerging Markets sliding 7.5%
  • In a flight-to-quality and market pressure to influence the Fed to cut interest rates, Treasury yields plummeted in May
  • 10-year Treasury Note yield fell 37 basis points to 2.09%, the lowest since 2017
  • Inversion of the 10-year and 3-mo T-Note yields returned May 23 raising recession concerns again
  • Inversion is when short-term interest rates are higher than longer-term
  • Market expectations for a Fed rate cut increased substantially 


June Update

Perhaps feeling the market pressure at the end of May and significant drop in market interest rates, Fed governors as well as Fed Chair Jay Powell began a series of comments this past week indicating that the Fed could cut interest rates if needed. The Fed pivot and subsequent long pause in interest rate changes were major shifts in its policy. Potentially cutting interest rates would be a complete reversal in policy and is being dictated by the market. The global stock markets responded positively and despite a much weaker than expected jobs report, ended the week with a 260-point gain in the Dow on Friday for its best week since November 2018.

  • Stocks surge to start June on Fed rate cut hopes
  • Dow jumped 4.7% for the week, while the S&P 500 and Nasdaq were up 4.4% and 3.9%, respectively
  • Market pricing in a 79% chance of a Fed rate cut in July (CNBC)


The Outlook

There are a number of moving pieces affecting the markets, with trade and the Fed at the center. Over the weekend, a new trade agreement with Mexico was announced by President Trump, which prevented the 5% tariffs (noted above) from being implemented. The G20 meeting at the end of June will be widely watched for any developments on US-China trade, where President Trump and President Xi are expected to meet.  We continue to encourage investors, to stay diversified and steadfast during the volatility, which again remains in the near-term forecast. 


~Your Nelson Securities Team

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