The stock market gave back a portion of its year-to-date return in the month of May. The US economy remains strong, but other uncertainties caused some investors to leave the stock market in favor of US Treasuries in May. Stocks declined and bonds rallied.
In mid-April investors were optimistic that the US and China would reach a mutually satisfactory trade agreement; however early in May news outlets reported that the Chinese had backed away from previously agreed upon terms. The administration took a strong position and responded by increasing tariffs on Chinese goods from 10% to 25%. The issue is much deeper than the trade imbalance between the two countries. Our national security is at risk. Tom Friedman, American political commentator and author who currently writes a weekly column for The New York Times, was interviewed on CNBC’s Squawk Box in May. In this interview https://www.youtube.com/watch?v=nVBqSOPWIUw Friedman points out that we are no longer trying to balance trade between China’s toys and tennis shoes and our soybeans and Boeings. He said, “We are going head-to-head with the most cutting edge companies.” He said it is past the time that we can turn a blind eye to this issue. It is about the character of what we sell and what they sell and their values matter. This will not be resolved soon and if you want an interesting perspective on the matter, Friedman’s interview is worth a listen.
On another matter, there has been zero progress on the UK’s exit from the European Union. It will be three years in June since the surprising Brexit vote that rocked the European Union. On May 25th Prime Minister Theresa May announced she will resign her post on June 7th. The market hates uncertainty and this piled on.
The demand in US Treasuries this month caused yields (interest rates) to fall. Even as the yield in the US is falling it remains higher than the interest rates on foreign bonds. Most government bonds in Europe still pay zero interest rate. This attracts foreign investors to our bonds which drives bond prices higher and interest rates lower.
A bombshell of an announcement came at the end of May. The president plans to levy a tariff on all goods coming out of Mexico to the US until Mexico helps stem the tide of migrants coming into the US illegally. The initial reaction of investors was to sell stocks on the expectation of the harm these tariffs may do to the US economy. This added to market uncertainty.
In spite of a strong economy, the geopolitical uncertainty roiled the stock market in May. Only time will tell how these issues are resolved and no one can predict the future. An unemotional response is called for in making decisions about portfolios. You can’t control the stock market and you can’t control the news. You can control the portfolio and manage it in line with a predetermined strategy that is consistent with financial goals, risk tolerance and time horizon.