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Week in Review | Week Ending May 31, 2019

03 June 2019

Clint McGarvin, CFA® | Portfolio Manager/Research Analyst


U.S. equities declined last week for the fourth consecutive week as large caps dropped about 2.6% and small caps were off about 3.2%. Over the four-week period, large caps were down approximately 6.6% and small caps were off just over 9%. The impetus for the declines was likely the imposition of 25% tariffs on $200 billion of imported Chinese goods which were quickly followed by 25% tariffs on $60 billion of U.S. exports to China. Large caps were down about 1.3% on Friday following comments by President Trump that he would impose 5% tariffs on goods from Mexico if the country did not stop immigration from Central America to the U.S. Unlike investors, consumers have thus far been unaffected by the escalation in the trade war as May’s Consumer Confidence Index® jumped to 134.1 from 129.2 in April. Within the Confidence Index, the Present Situation Index, which is the consumer’s assessment of current business and labor market conditions, increased from 169.0 to 175.2. But, more importantly for the economic outlook, consumer expectations also increased in May to 106.6 from 102.7. The data for the Consumer Confidence Index was collected May 16, eleven days after the hike in tariffs, so the escalation of the trade war is unlikely to have been fully factored in by consumers. Consumer expectations have been closely linked to future spending plans so the fact that the Expectations Index is rising bodes well for consumer spending. However, we should caution that the decline in equity markets may reduce the confidence data just as it did in the fourth quarter of 2018.[i]

Consumer spending as measured by Personal Consumption Expenditures (PCE) increased 0.3% in April following a 1.1% jump in March. Personal income was up 0.5% in the month, the largest increase in four months. The PCE inflation measure increased by 0.3% in April and is now showing an accelerating trend following increases of 0.1% and 0.2% in February and March, respectively. Core PCE inflation, which excludes food and energy is showing the same acceleration, rising 0.2% in April following increases of 0.0% and 0.1% in February and March, respectively.[ii]


International developed equities declined a little more than 1.85% while the emerging equity index was the performance derby winner last week rising by about 1.25%. Emerging equities were largely mixed Friday following the release of the official Chinese manufacturing Purchasing Managers’ Index (PMI), which came in below expectations at 49.4 compared to 49.9. Any reading below 50 indicates a contraction in that sector of the economy. The Chief Economist at Barclay’s Asia noted that the trade war is having a noticeable effect on Chinese manufacturing. He noted that the trade-related indices within the PMI fell significantly in May. The services sector in China is expanding at a solid pace as the official Services PMI hit 54.3 in May.[iii] European stocks as measured by the Stoxx 600 traded at a three-month low Friday following the news that the Trump administration may increase tariffs of Mexican goods.[iv] Additionally, the signs that the European economy continues to slow came out Friday as the economy in Italy contracted slightly in the first quarter, falling 0.1% and is now flat for the last twelve months.

Fixed Income

Long-term Treasuries jumped 3.11% on the week as yields declined while high-quality bonds were up slightly more than 0.9%. Treasury yields plunged Friday with the 10-year yield posting the biggest one-day decline since the most recent recession, closing Friday at 2.14%, a drop of 8 basis points. The 3-month was down 3 basis points to a yield of 2.35%, the yield curve is now inverted by 21 basis points.[v] The 3-month to 10-year segment of the yield curve has been a very reliable predictor of recessions with a lead of approximately 18 months; we once again caution that the inversion needs to remain in place for more than a few weeks. Also, in predicting past recessions, the short end of the yield curve rose to exceed the long end. This time, however, is a very atypical inversion as the long-end of the curve declined faster than the short-end has been declining. Therefore, we must be wary of stating this inversion may predict a recession. But an inverted yield curve does change behavior on the part of investors, corporations, and bank lending officers and the change in behavior may be what contributes to a recession.


Gold has been a major beneficiary of rising recession fears as prices have with spot prices rising to the highest level since March 11 at $1,311.15.[vi] On the other hand, oil prices have plunged, down 10.4% last week, oil is now at the lowest level since early March.[vii]


The trade war remains the driver of both stock and bond prices around the world. The economic news in the U.S. is positive overall. Internationally, economies are slowing but data does not yet indicate a recession. Equity prices are declining precipitously while bond prices are rallying, creating inverted yield curves, not only in the U.S. but in many places around the world. The heightened fear of a recession is increasing anxiety in both the stocks and bonds but not yet in the consumer. If the stock market continues to decline, we should expect consumer and business executive confidence to follow the lower investor confidence which could lead to a much slower economic growth rate in the U.S. The data out in June could tell a different story than what we have seen for the last two months.

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[i] The Conference Board (2019), Consumer Confidence Survey® May 2019. Retrieved from
[ii] Bureau of Economic Data (2019), Personal Income and Outlays, April 2019. Retrieved from
[iii] CNBC (2019) Asia stocks mixed as Chinese economic data disappoints; automakers tumble. Retrieved from
[iv] CNBC (2019), Europe Stoxx 600. Retrieved from
[v] U. S. Department of the Treasury (2019), Daily Treasury Yield Curve Rates. Retrieved from
[vi] CNBC (2019), Gold COMEX (Aug’19) (@GC.1:CEC:Commodities Exchange Centre). Retrieved from
[vii] CNBC (2019), WTI Crude (Jul’19) (@CL.1:New York Mercantile Exchange). Retrieved from

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