weekly market commentary

Weekly Market Commentary June 3, 2019

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The S&P 500 plunged 2.6% last week as economic data remained soft and the Trump administration surprised investors by threatening tariffs on Mexico over immigration concerns, rather than trade negotiations. The global MSCI ACWI dropped 1.9% as international markets held up slightly better than the U.S. The Bloomberg BarCap Aggregate Bond Index soared 0.9% on worries tariffs and the associated uncertainty will push rates lower.

Key Points for the Week

  • The U.S. surprised investors by threatening new tariffs on Mexico for its lack of support in stemming illegal immigration from other Central American countries.
  • Weakening economic data has pushed intermediate-term bonds below short-term rates again — creating an inverted yield curve.
  • Stocks dropped more than 2% as potential tariffs against Mexico were viewed negatively by the markets.

May was a difficult month for stocks. The S&P 500 fell 6.4%. The MSCI ACWI dropped 5.9%, and the Aggregate Bond Index soared 1.8% as investors flocked to investments likely to do well if the economy slows further. The steady flow of negative news pushed the S&P 500 lower each of the last four weeks.

treasury yield curveTariffs and the Yield Curve

Investors should remain prepared for continued market volatility until global policymakers provide greater clarity on the importance of global trade. This week, the Trump administration surprised investors by announcing potential tariffs on Mexican goods unless Mexico does more to combat illegal immigration. The use of tariffs, a tax on trade, as a tool in an immigration debate left markets surprised and concerned tariffs have become the tool of choice for the administration.

Markets reacted negatively as stock markets fell and bond yields declined on concerns the tariffs and general uncertainty regarding U.S. trade policy would delay investment and make approving trade deals more challenging. Industries reliant on Mexican factories, such as automobiles and railroads shipping goods from Mexico, were especially hard hit.

The decline in bond yields on Friday extended the recent decline in yields as investors remain concerned global economic growth is slowing. Global bond yields fell last week to multiyear lows. Japan, Britain, Australia, Germany, and the U.S all saw their government bond yields reach their lowest levels in recent years.

As the accompanying chart shows, the U.S three-month and 10-year Treasuries inverted again, meaning short-term rates are higher than long-term rates. This happened in March, but the depth and duration of the inversion has increased this time around. The yield curve has historically been a forward indicator for economic performance, so this could pressure the Fed to cut interest rates to stem a potential economic slowdown. Coming economic reports will take on even greater importance given the shape of the yield curve.

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