We all complain that so much is happening so fast these days it’s hard to keep up. However, the plethora of events that could have a negative impact on the financial markets is being ignored, and investors seem to be assuming that everything going on will somehow be resolved favorably. The S&P 500 index is up 15% so far this year in spite of a world-wide economic slowdown and political turmoil in the United States, the United Kingdom and almost everywhere else.
What are some of the key issues? US/China trade deal, Brexit , Federal Reserve policy, Congress needing to increase the debt ceiling, just to name a few. If these issues don’t work out favorably, we can expect some market turbulence going forward. Its also worth considering a few developments that have gone right in the last few months. The Federal Reserve has decided to pause on its policy of raising interest rates and shrinking its balance sheet; the government shutdown has ended; there is some better economic news out of China, which is the primary engine of world growth; and inflation has remained low almost everywhere. There are some signs that the second half of the year might be better for the U.S. and Europe.
Here is what I’m watching:
The initial report for Gross Domestic Product (GDP) for the 1st quarter of 2019 was much stronger than expected at 3.2%. However, a look inside the components of GDP shows that most of the growth came from an increase in inventories and net exports. Private Domestic Final Purchases, which is consumer spending plus business fixed investment plus residential fixed investment, only rose at a 1.3% annual rate in 1Q19 (vs. +2.6% in 4Q18), up 2.8% year-over-year. More importantly the trend over the last several quarters has been declining as the chart below shows.
While there have been some signs of stabilization in global economies, the trend still appears to be down. More than half of the global indicators I watch are giving negative signals, supporting my position that the global economy remains in a slowdown. Below is a chart of the Global Manufacturing PMI (purchasing manager index) showing a decline to just above 50 – the level that divides growth from contraction.
While the S&P 500 Index hit an all-time high on April 30, 2019, the was a concerning lack of breadth from the individual stocks. Of the 753 days that the S&P 500 closed at a 52-week high since 1990, on average 13.5% of the stocks within the S&P also reached a 52-week high. On Tuesday 4/30/19, only 2.6% of the components or just 13 stocks hit a new high along with the index. This means the market is being pushed higher by a small group of out-performers.
Another concern is the divergence between large companies and small companies. While the S&P 500 Index (the largest 500 companies) has reached an all-time high, the Russell 2000 Index (index of 2,000 of the smaller companies in the US) has lagged behind over the last couple of months.
Also, as my 4/23/19 note indicated, trading volume has been quite low since the end of March 2019. This indicates that no one is scrambling to buy stocks.
Finally, May is historically one of the weakest months of the year for the stock market.
Putting all of this together, the conclusion is that there is a neutral background for the financial markets. I expect to see a pullback in stocks during May, albeit a small decline. However, I do expect stocks to continue to do better than bonds going forward. We continue to monitor our indicators and will adjust accordingly.
I hope this report proves informative.
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May Calendar of Events (comments and additions for future months are always welcome)
- May is National Mental Health awareness month. Nearly 44 million American adults, and millions of children, experience mental health conditions each year. Let’s all get educated on this issue and work towards acceptance and inclusion of people dealing with mental health issues.
May 5th Cinco De Mayo – stay thirsty my friends
May 12th Mother’s Day – wishing all mom’s, grandmothers, and great grandmothers a wonderful day.
May 18th Armed Forces Day. Dedicated to recognizing those presently serving in our armed forces
May 23rd My daughter Caryn’s birthday
May 27th Memorial Day – let’s remember and give thanks to all who served our country
Sources: Blackstone, Yardeni Research, Ned Davis Research, Raymond James & Associates
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