May 27 – May 31 Week in Review
It was a tough week for U.S. equities last week and an even tougher month. Lingering U.S.-China trade tensions and a surprise 5% tariff rate on Mexico from President Trump contributed to broad based selling in an effort to de-risk and seek safety, primarily in U.S. Treasuries.
The S&P 500 lost 2.6% on the week and 6.6% for May, registering its first monthly decline in 2019. The Dow Jones Industrial Average, down 3.0%, the Nasdaq Composite down 2.4%, and the Russell 2000 lower by 3.2% finished with monthly losses of 6.7%, 7.9%, and 7.9% respectively.
Not one S&P 500 sector finished higher last week, and nine sectors finished with losses of between 2.1% and 4.5%. All the selling sent the S&P 500 below its 200 day moving average on Friday.
What was the culprit? Another week came and went with no progress on the U.S.-China trade front. Instead, tensions appeared to escalate following negative developments throughout the week. For starters Chinese state media suggested that Beijing could use its dominant position in rare earth minerals to restrict exports. Then Beijing reportedly put U.S. soybean purchases on hold in May. Lastly China said it is drafting a list of "unreliable" foreign companies that harm the interests of its firms, increasing speculation about Chinese retaliation against the U.S.
The big headline on Friday, which helped accelerate weekly losses was President Trump surprise announcement of a 5% tariff rate on all goods imported from Mexico starting on June 10. The tariff rate will increase incrementally during the summer and reach 25% on Oct. 1 unless Mexico takes actions to curb the flow of undocumented migrants entering the U.S.
Investors continued to pull money from the stock market, and bolster demand for U.S. Treasuries, fearful that these trade tensions will bring slower economic growth and lower earnings prospects. The 2 year yield dropped 20 basis points to 1.94%, and the 10year yield dropped 18 basis points to 2.14%. For the month, the 2 year yield fell 33 basis points, and the 10 year yield fell 37 basis points.
Strikingly, the 3 month yield finished 21 basis points higher than the 10 year yield, widening this difference to its largest since the financial crisis. This term spread, according to research from the Federal Reserve Bank of San Francisco, is the most reliable predictor of a recession among the different term spreads.
In other markets the 8.8% weekly drop in WTI crude, which closed Friday at $53.48 a barrel, also reflected concerns that slower growth will weaken end demand. The U.S. Dollar Index advanced 0.2% to 97.76 last week.
June 3 – June 7 Economic Calendar