June Market Update

by | Jun 5, 2019 | Market

This not the Fall of 2018

1. The Fed tightening into a slowing global economy was the cause of the December collapse last year not China/US trade concerns.
2. Both the US and China are currently stimulating their economies with monetary and fiscal initiatives; the near 20% sell off last year came in the midst of tightening.

The Trade War is NOT about tariffs but about intellectual property theft

1. On April 26th Chinese President XI announced a package of proposals in front of some 5000 participants representing 150 countries reiterating China’s commitment to intellectual property protections- markets ran to all time highs shortly after.
2. A week later China did a “180” on May 2nd, while the US trade team was in China and took away all agreed upon enforcement mechanism in regards to intellectual property; this started a spike in volatility.
3. The numbers on trade are much more damaging to China as a % of GDP; however, inflation in consumer goods is a concern for the US as tariffs are usually passed on to the consumer.
4. This does not mean a deal is dead or broken, however, the timeline is pushed back. Trump and Xi will meet at the G20 meetings in Japan June 28 & 29. Marking a potentially key inflection point for markets.

Although volatility has risen and markets have pulled back from their highs, traditional risk aversion signals are not sounding yet

1. The S&P peaked on May 3rd, and as of today its trading just under 5% off all time highs. To put in perspective- 3% corrections occur on average 7 times per year while 5% corrections occur 3.3 times per year.
2. The 10 Year Treasury yield is at 2.25%, yes down from 2.59% in mid April, but clearly no panic flight to quality trade is evident yet.
3. VIX (Volatility Index) peaked at 20 during this latest sell off and since have fallen back to 18. This is typical of profit taking not panic selling.
4. There have only been 14 prior observations since WWII when each month Jan-April was positive – the average return for the rest of the year during those occurrences was over 10%, however, there was an average 9% sell off at some point prior to the end of the year.