May certainly turned out to be an interesting and volatile month for stock markets around the world. During the first four months of the 2019 calendar year, stocks rose steadily with very few pullbacks. This pattern reversed course in dramatic fashion during the month of May.
Since the Christmas Eve lows, stocks had reversed course and moved higher on a steady diet of relatively stronger economic reports, better than expected corporate earnings, low inflation expectations, and continuing strong jobs creation. This was all supported by a Federal Reserve Bank that pivoted from raising interest rates to indicating that they would pause and be patient and data-dependent going forward. All of this led to the S&P 500 reaching a new all-time high of 2,954 in late April.*
All of this changed very quickly when over the first weekend of May, the expected trade/tariff agreement between the United States and China fell apart during last-minute negotiations. The markets had received several tweets over the previous two weeks from the Trump administration indicating that we were in the final stages of putting together the trade agreement. President Trump added to the expectation when he stated on Tuesday that we should have an agreement by the end of the week. On Sunday, markets that had priced in the agreement by continuing to move higher, came to the abrupt realization that this was not going to happen when the president stated that China had reneged on major portions of the agreement, and he was implementing new tariffs against the world's second largest economy.
Subsequently, we have seen a number of economic indicators slow down, including new job creation and initial readings of second-quarter GDP growth. We have also seen manufacturing activities slow in the wake of the global trade uncertainty. As various global stock markets responded by dropping 7%-10% during the month of May, the Federal Reserve Bank stepped in towards the end of this down cycle and stated that they would do whatever was necessary to keep the economy growing.** Market participants took this as the Fed indicating that it was even willing to cut interest rates if necessary, to help support the U.S. economy. The markets responded by starting to rebound. Next, the U.S., who had threatened 5% tariffs against Mexico if they did not step up and help stem illegal immigration into the United States, came to an agreement. This was seen as a positive development for continued North American, and therefore global economic growth. These developments have allowed the markets to recover nearly two-thirds of the drop that we had seen during the month of May in short order.
What does all of this mean? It means that in a technologically connected world in which social media tweets on headlines can move markets so dramatically, it is important for you to keep your investment strategies in line with your long-term goals and objectives. When markets hit new all-time highs, it's important to consider taking profits and creating cash for your short-term needs over the next 6 to 12 months. It's also important to rebalance your accounts back towards their long-term goals so that you do not allow too much risk in your portfolios. It is also important to remember that hope is not a strategy. Having a well-diversified portfolio and staying disciplined with your decisions is critically important. We at Horizon and Impel Wealth Management stand ready to help you manage the economics and emotions of this process.
Against this backdrop, we are making no further changes to our model portfolios, as even though the economy is slowing, growth is still positive. This leads us to cautious optimism in the markets between now and the end of the year. We also continue to see the potential for further bouts of volatility as we are late in this economic cycle, which celebrates it's 10-year birthday in this month. The members of this committee continue to take seriously the responsibility of managing our clients' hard-earned investment assets to help them meet their retirement and investment goals going forward. Please do not hesitate to contact your advisor if you have questions regarding this.
Sources:
Research comes from the below Investment Strategists and Economists:
Cetera Investment Management, Gene Goldman
First Trust, Brian Wesbury
Blackrock, Richard Turnhill
Charles Schwab, Liz Saunders
JP Morgan Chase, Dr. David Kelly
Nuveen, Bob Doll
Raymond James, Larry Adam & Scott Brown
*
InvesTech Research, Online Interim Bulletin, Volume 19, Issue 05.IB, May 3, 2019
**Advisor Perspectives, "Trade Tension Takes Turn at Top", by Liz Ann Sonders, Jeffrey Kleintop, and Brad Sorensen of Charles Schwab, 5/24/2019
*Investments in securities do not offer a fix rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results. Investors cannot directly invest in indices. Past Performance does not guarantee future results. *
*Disclosures
The views stated in this letter are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
