The fact that US stocks finished the week lower seems to weigh on concerns that U.S. trade tensions with China are expected to be prolonged. The broad sentiment across economic reports suggest that global growth is showing signs of slowing. Lower oil prices pushed energy stocks down, but utilities came back to lead advancing sectors. This is a “normal” seasonal shift since it’s common for sector leadership to alternate from over time. For investors, this reinforces why it’s important to ensuring your portfolio is diversified across different sectors with variations in risk.
The US economic figures are continuing strong; perhaps the strongest we have seen to date. A snapshot of the key figures tells the story pretty well. The US is about to tally the longest economic expansion yet. Based on current figures, the streak of positive U.S. GDP growth will pass the 1990s expansion to become the longest on record in June. As for unemployment, the country is at a 50-year low. At 3.6%, the unemployment rate has fallen from 10% a decade ago to its lowest level since the late 1960s. The US markets are on their second-best all-time bull market. In the current run, the market has gained more than 400% from its lows in 2009. The only previous bull market to overtake this stretch was the 1987-2000 run that was both the longest and strongest.
Actions by The Fed
The US Fed continues to help moderate the markets as it has for nearly a decade. Despite tariff war worries, geopolitical issues and global uncertainties, the Fed has stayed steady. What was a late-2018 sell-off then became a strong 2019 rally thanks mostly to the Fed’s pivot to a more friendly position on interest rates. The release of the Fed’s recent meeting minutes last week proved that the U.S. central bank is holding off on additional rate hikes for the immediate future. Since the economy is growing modestly with low inflation, the Fed’s policy makes sense. But because the market that has gotten used to the Fed’s defensive position, any policy shift viewed as a negative could be a potential market risk. Investors then are eyeing allocation to some bonds as a good defense.
Metals and Mining
It wasn’t a great week for gold bugs, as the gold market has essentially given up all its earlier gains and is preparing to end the session at a near a two-week low. The week started out positive week for gold as investors moved into safe-haven assets likely due to the across-the-board 2% drop in equities. But that was short lived with gold prices looking to end the week down nearly 1% since last Friday. June gold futures last traded at 1275.90 an ounce. Certainly, some bears are pushing the renewed bearish sentiment for the precious metal expecting that the momentum of strong equities could push prices to a new low for the year in the near-term. Platinum made small gains on Friday after reaching its lowest level since February 15 and palladium made the most gains on Friday, ticking up over 1 percent and once again entering into US$1,300 per ounce territory.
Energy and Oil
Natural gas has been inching higher as above normal temperatures are coming into view. Ending the week, crude oil settled 11 cents lower at $62.76 as OPEC considered easing production cuts amid escalating Middle East tensions. Equity markets finished the session on a down note as investors were reluctant to push stocks higher with uncertainty surrounding trade negotiations. Analysts believe natural gas will likely remain locked in a narrow trading pattern as strong production and mild temperatures chip away at the global storage deficit.
Trade worries are certainly front and center for global markets. Negotiations have stalled and the threats of additional retaliatory tariffs between the US and China are in play again. Last week’s U.S. manufacturing and durable goods orders indicate that activity slowed recently. This has again increased fears that trade turmoil is beginning to show up in the entire economy. When U.S.-China trade tensions escalated in 2018, markets absorbed sharp sell-offs and enjoyed serious rallies. The same has occurred as of late, possibly linked to some positive signs on broader trade with the U.S. dropping retaliatory tariffs with Canada and delaying auto tariffs with the EU. Manufacturing and trade are important, but they are not the central driver of U. GDP. That number is driven by consumer spending. As an important side note, the British pound fell against the U.S. dollar but rebounded slightly after embattled UK Prime Minister Theresa May announced that she would resign on June 7 given her inability to get her Brexit deal approved by the British Parliament.
The Week Ahead
The coming week will be shortened by the Memorial Day holiday in the US. Look for second-quarter gross domestic product (GDP) which is slated for Thursday, and both consumer spending data and the University of Michigan Consumer Sentiment Index will be released on Friday.
Key Topics to Watch
- US – China Trade
- 2nd Quarter GDP
- Consumer Spending Data
- Consumer Sentiment Index
Markets Index Wrap Up