Wall Street Gains Despite Geopolitical Turmoil

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  • Unemployment Drops: Job Market Drives Economic Growth
  • Geopolitics, Trade War Threats & “Italexit” Dominate Headlines
  • International Turmoil Fuels Small-Company U.S. Stocks, Treasury Bonds
  • Economic Indicators on Our Radar

May’s headlines were full of head-snapping about-faces. U.S. stock prices rose through much of the noise, until they didn’t, and market volatility returned with a vengeance. On Tuesday, the VIX, an index also known as Wall Street’s “fear gauge,” jumped 28.7%, its biggest move since late March.

Still, U.S. stock markets ended the month in the black with the S&P 500 index rising 2.2% and the Dow Jones Industrial Average posting a 1.0% gain.

For the year through Thursday, the Dow Jones Industrial Average has declined 0.2%, while the S&P 500 index has returned 2.0%. The MSCI EAFE index, a measure of developed international stock markets, is down 1.5%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.22% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 1.5% for the year.

Low Unemployment Rate & Consumer Confidence Drive Economic Growth

This week’s economic reports delivered plenty of data to support our view of continued U.S. economic growth. As teased by President Trump via Twitter an hour before the data’s official release, our economy added 223,000 jobs in May and the unemployment rate dropped to 3.8% from 3.9% the month before—the lowest since April 2000.

U.S. consumers remain confident and upbeat, with their outlook on current economic conditions at a 17-year high in May. That confidence manifested itself at the cash register in April as American households used higher incomes and tax cuts to spend 0.6% more than the month before, though a good portion of that spending can be attributed to higher prices at the gas pump.

Businesses are likewise optimistic. With manufacturing production up, banks reporting increased demand for lending and homebuilding and home sales increasing, there’s plenty of positive momentum in the economy. The main fly in the ointment for business leaders: A tight labor market and the lack of skilled workers is leading businesses to pay more for qualified employees—another example of what we call a “growth problem.”

Geopolitics Dominate Wall Street Headlines

Uncertainty over the potential for a trade war is also a damper on business confidence, and a major source of increased market volatility here and abroad.

A new and potent catalyst was the concern that Italy would exit the European Union and the euro after failing to form a pro-E.U. coalition government. At least, that was the main market-moving event until yesterday’s announcement that the U.S. would impose steel and aluminum tariffs on some of its closest allies.

In fact, investors have had to contend with a host of geopolitical issues all month long. First, there’s the on-again, off-again, maybe-on-again U.S.-North Korea summit. Add to that the confused messaging about the U.S. levying tariffs on Chinese imports, plus oil prices that were approaching $80 per barrel before Russia and Saudi Arabia agreed to boost production, sending prices downward. And let’s not forget that the North American Free Trade Agreement (NAFTA) negotiations are at an impasse, and a 25% tariff on imported cars has been publicly floated.

None of these issues are going away any time soon. The trade-war tit-for-tat and potential for a major country to exit the E.U. are, in our view, of greatest concern. We also expect that market disruptions will provide fertile hunting ground to find fear-based bargains and buying opportunities for long-term investors like you (and us).

Stock & Bond Markets React (Overreact?) to Overseas Tumult

Amid the geopolitical turmoil, traders turned to small-company U.S. stocks and Treasury bonds.

While the S&P 500 index is 5.8% below its January all-time high, the Russell 2000 and S&P SmallCap 600 indexes of smaller companies both hit record highs on Wednesday. Smaller companies tend to do most of their commerce domestically, unlike the multinational scope of the more prominent American businesses. The uncertainty around trade tariffs has many investors banking on the relative stability of the U.S. economy and a desire to avoid exposure to foreign economies.

As for the bond market, recall the recent hullabaloo about the 10-year Treasury’s yield surpassing the 3% threshold to 3.11% (with bond prices falling as a result)? Well, just a couple of weeks later, the 10-year Treasury closed the month at 2.86% as the flight-to-safety trade kicked in and investors flocked to the certainty these bonds provide. Until proven otherwise, U.S. Treasury bonds are the go-to asset when investor fear rises.

What’s on Tap: Upcoming Economic Indicators

Next week brings fewer economic reports to the table, but we’ll still get helpful reads on factory orders, the service sector, job openings and consumer credit. Headline-based volatility tends to fill the vacuum in weeks without a lot of data on which investors can base their trades.

If you’d like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note: This update was prepared on Friday, June 1, 2018, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

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