May 2019 Market Commentary

Volatility returned to equity markets in May after four consecutive months of gains to start the year. The Russell 3000 Index, used to measure the broad performance of US stocks, declined -6.5% in May, though the index is still up +10.9% year-to-date. International stocks declined -5.4% on the month per the MSCI ACWI ex-US Index, which has gained +7.1% YTD. On the fixed income side, the Bloomberg Barclays US Aggregate Bond Index gained +1.8% MTD, as investors flocked to safety during the equity sell-off, and is up +3.0% YTD. A balanced portfolio, comprised of 60% in global equities and 40% in fixed income, would have declined -3.1% in May for a +7.6% performance YTD.

Much of the market decline in May seemed to be related to concerns around a potential trade war and the negative economic consequences thereof. White House negotiations with China stalled as the two sides could not come together on an agreement; meanwhile, President Trump has threatened new tariffs on Mexican imports as part of his immigration dispute with our southern neighbor. The consensus reaction to the ongoing trade dispute has been that higher tariffs will be harmful to the US economy, with President Trump’s chief economic advisor admitting that the domestic consumer will suffer from a protracted trade war. Tariffs make goods more expensive, which in turn dampens economic activity. As such, we believe all parties involved have an incentive to come to an equitable agreement.

While we don’t profess to know how this situation will be resolved, we do feel confident that the data will be a better guide to our investing decisions than any guess we have regarding foreign policy outcomes. In fact, while market participants were wringing their hands over trade uncertainty during the past month, we saw no changes in any of our “Three Dials” indicators. Below is a summary of where each of our Three Dials stands as of month-end:

1. Market Sentiment and Momentum: Positive

May’s market decline appeared to be a result of profit-taking after the double-digit run-up for stocks to start the year. Key support levels held firm as traders stepped in to buy the dip. While we expect volatility to be a staple of this late-cycle market, our Momentum Indicator remains in a bullish position for the time being.

2. Economic Fundamentals: Positive

Leading economic indicators continue to show signs of improvement, hinting that we should see continued strength in the US economy. Financial conditions remain quite accommodative, as the Fed has shown every willingness to step in to provide support at the first sign of trouble. Furthermore, consumer confidence recovered to the levels seen last fall, indicating that business and labor market conditions continue to improve. Despite the trade chatter, our Fundamental Dial paints a pro-growth outlook for investors.

3. Valuation: Negative

Valuation remains the one blemish in the current investing landscape. A decade of artificially low interest rates and an indefatigable stock market rally have led to historically elevated price levels, which has caused us to moderate our overall risk positioning.

On a composite basis, our “Three Dials” paint a cautiously optimistic picture of the investment landscape.

Sources:

https://www.nytimes.com/2019/05/12/us/politics/trump-us-china-economy.html

https://www.nytimes.com/2019/05/30/us/politics/trump-mexico-tariffs.html

https://www.conference-board.org/data/consumerconfidence.cfm

https://www.chicagofed.org/publications/nfci/inde