Trade tensions put investors to the test in May
E*TRADE Capital Management
Memorial Day is the unofficial kickoff to summer in the US, which is generally welcome news, but not necessarily for investors—hence, the shop-worn adage, “sell in May and go away.” This year the dusty bromide got an assist from escalating trade tensions between the US and China.
As the two sides exchanged barbs and ratcheted up tariffs, a much-anticipated trade agreement crumbled—taking the financial markets with it. To add to the tempest, President Trump threatened Mexico with tariffs on the month's final day of trading, sending markets tumbling yet again. The waves have now turned choppy, and investors could soon be looking to the Federal Reserve for a life vest.
Despite a robust US economy and historically low unemployment, stocks took it on the chin in May, resulting in the first down month for equities since December. While trade issues contributed to the downdraft, investors also fretted about slowing global economic growth.
FactSet Research Systems
In an increasingly risk-off environment, growth-oriented sectors sustained the steepest declines while real estate and utility shares fared better amid falling interest rates and increased demand for dividend-paying stocks.
FactSet Research Systems
International equities also saw an uptick in volatility, although there was wide dispersion in returns between regions. Developed-market equities finished May in the red but generally outperformed their US counterparts. Emerging markets lost more than 7% on the month, with returns especially weak in Asia amid trade concerns and profit warnings in China.
FactSet Research Systems
May was a busy month in the fixed income markets, which saw a sharp drop in Treasury yields and accelerating outflows from high-yield funds.
As investors sought shelter in safe-haven assets, a key portion of the Treasury yield curve inverted, with 3-month Treasury yields surpassing 10-year Treasury rates in the final week. When the dust settled, longer-dated Treasuries turned in the strongest monthly performance of any major asset class.
Source: FactSet Research Systems
There’s no shortage of possible disruption in the markets right now, which can create anxiety among even the most experienced investors. Here are three themes to keep an eye on as we gear up for summer:
• Falling rates and the hunt for yield: With interest rates falling again, income-focused investors will likely be on the prowl for new sources of yield. While it may be tempting to consider risky asset classes, some investors may take a closer look at Treasuries—especially if the markets remain unsettled and the yield curve inverts any further.
• Focus on the Fed: We haven’t heard much from the Federal Reserve in a while, which makes sense given the crosswinds of healthy economic growth and measured inflation—but if the equity markets continue to weaken, it wouldn’t be surprising to see the Fed come off the sidelines and take action. Already, fed funds futures are predicting a greater-than-50% chance for a 0.25% cut in the fed funds rate by September—a sea change from last year, when investors were expecting the Fed to hike rates in 2019.
• Keep it balanced: Given all the market noise, a balanced investment approach may be an investor’s best friend. While the S&P 500® fell by more than 6% in May, high-quality fixed-income exposure could have helped stem those losses. In fact, Morningstar data show that a model 60/40 equity/fixed income blend lost half of what an all-equity portfolio did in May—but still finished the month up more than 7% on the year.
It’s been a wild ride of late, but the US economy is still on solid ground and joblessness is at a 50-year low. Although tariffs are beginning to take a toll, the markets should still have plenty of dry powder remaining. Ultimately, both the White House and the Federal Reserve could help determine how long it lasts.
Thanks for reading, and we’ll talk to you again next month.
Vice President, Investment Strategy, E*TRADE Capital Management, LLC
Mike Loewengart is the Vice President of Investment Strategy for E*TRADE Capital Management, LLC. Mike is responsible for the asset allocation and investment vehicle selections used in E*TRADE’s advisory platforms. Prior to joining E*TRADE in 2007, Mike was the Director of Investment Management for a large multinational asset management company, where he oversaw corporate pension plan assets. Early in his career, Mike was a research analyst focusing on investment manager due diligence for the consulting divisions of several high-profile investment firms. Mike holds series 7, 24, and 66 designations, as well as the Chartered Alternative Investment Analyst (CAIA) designation. He is a graduate of Middlebury College with a degree in economics.
Director, Investment Strategy, E*TRADE Capital Management, LLC
Andrew Cohen is a Director of Investment Strategy for E*TRADE Capital Management, LLC. Prior to joining E*TRADE, Andrew was the Director of Investments and Operations for a large Registered Investment Advisor, where his responsibilities included investment manager research, asset allocation, and portfolio construction. Previously, he was a Senior Research Analyst and Team Leader for a leading wealth management platform. He is a CFA® charterholder and a member of both the New York Society of Security Analysts and CFA Institute. He is a graduate of Virginia Tech with a BS in finance.