With just four trading days remaining for May, the “rear-view mirror-ists” will be quick to say investors should have expected the noticeable pullback coming (nevermind that the month of May was firmly positive in each of the last 5 years). The S&P500 is off -3.9% with most attributing the decline to renewed tension between the US and China over trade-related policy and the fact is that until recently, most investors anticipated a trade agreement was not just close, but a virtual certainty in early 2019. Combined with a US Fed that now seems firmly on hold from any additional interest rate hikes this year, the stock market enjoyed support. While the Fed still appears content with its patient posture (very important), a truce between the US and China on trade is no longer in clear sight. Interesting is that smaller-size companies which are often believed to be more insulated from the dynamics over global trade and should in theory experience less influence from tension are actually faring noticeable worse in this latest war of words. But more telling perhaps is that international equities and those domiciled in Asia especially are really getting crunched compared to US domiciled companies.
Following one of the best four-month stretches for equity markets in recent memory, the month of May is proving more challenging with the S&P500 experiencing its worst week of the year. Despite a better than expected quarter of economic growth during the 1Q and earnings that are not as soft as feared, optimistic sentiment of investors that propelled the markets to swift recovery is now deteriorating due to escalating tension between the US and China in its ongoing trade negotiation. The US view is that China backed away/recanted from prior commitments and broke the deal. As a result, the S&P500 suffered a setback of -2.1% last week even despite a late-day rise on Friday (perhaps a show of optimism that drama between the US/China might progress over the weekend). That trade-related uncertainty and market pressure looks set to continue into a new week on headlines that discussions over the weekend made little progress and actually seem to be moving further apart. Abroad, international equities and emerging markets in particular are being punished more acutely as evidenced by the MSCI EM index forfeiting -4.5% last week.
Four months of 2019 are in the history books and investors should be delighted, as January, February, March, and April were each positive performance experiences. The cumulative result is a total return exceeding +18% for the S&P500 index. That’s well ahead of the average January to April return of +3.7% over the past 25 years, and is an attractive return for most full years. A “4-peat” is rare, but not unprecedented with 2019 notching the 16th observation since 1950. The other 15 historical occurrences went on to provide an additional +10% average return for the final 8 months of the year, though there was usually a pullback (-8% on average) along the way. The S&P500 index added +4% during April boosting the strong 1Q returns. Client portfolios continued their advance, as both stocks and bonds provided positive returns.