May 2019 Market Update
Market Update
(all values as of 03.29.2024)

Stock Indices:

Dow Jones 39,807
S&P 500 5,254
Nasdaq 16,379

Bond Sector Yields:

2 Yr Treasury 4.59%
10 Yr Treasury 4.20%
10 Yr Municipal 2.52%
High Yield 7.44%

YTD Market Returns:

Dow Jones 5.62%
S&P 500 10.16%
Nasdaq 9.11%
MSCI-EAFE 5.06%
MSCI-Europe 4.60%
MSCI-Pacific 5.82%
MSCI-Emg Mkt 1.90%
 
US Agg Bond -0.78%
US Corp Bond -0.40%
US Gov’t Bond -0.72%

Commodity Prices:

Gold 2,254
Silver 25.10
Oil (WTI) 83.12

Currencies:

Dollar / Euro 1.08
Dollar / Pound 1.26
Yen / Dollar 151.35
Canadian /Dollar 0.73

Macro Overview

The ongoing trade dispute between the U.S. and China escalated in May as the U.S. signaled that it had not finalized a deal yet with China. The lack of a deal led to the U.S. announcing an increase in tariffs from 10 percent to 25 percent on $200 billion of Chinese imports.

The U.S. Department of Commerce began assessing Chinese imports arriving at U.S. ports with a 25% tariff at 12:01 AM on June 1st. The tariff increase affects a broad range of imported products, including modems, routers, furniture, and vacuum cleaners. Additional tariffs were also proposed by The Office of the United States Trade Representative on essentially all remaining imports from China, valued at about $300 billion.

The proposed tariff increases by the United States caused China to retaliate against the U.S. with its own tariff proposals on U.S. goods including alcohol, swimsuits, and liquefied natural gas (LNG). The Chinese government may apply additional tariffs to more meaningful products including food, energy and aircraft products from the U.S.

The recent market downturn has primarily been due to the uncertainty of the trade disputes and the effects of tariffs on the U.S. and international economies. Analysts believe that the equity market pullback along with the pending trade disputes have raised the possibility of an interest rate cut by the Federal Reserve later this year.

Longer term U.S. Treasury bond yields fell to their lowest levels since 2017. Combined pressures from the trade disputes to the pending Brexit turmoil in Europe has fostered increasing demand for U.S. Treasury bonds, which has resulted in higher bond prices.  The fixed income market is looking at the probability that economic weakness will lead to the Federal Reserve to actually cut interest rates sometime this year in order to bolster the U.S. economy. Many believe that the Fed needs to move quickly in order to shore up growth at the first sign of any economic contraction.

Mortgage rates fell below 4% for the first time since early last year helping to stabilize housing market activity. The average mortgage rate on a 30-year fixed conforming loan was 3.99% at the end of May, as tracked by Freddie Mac, the lowest since January 2018. Falling mortgage rates tend to entice buyers to sell their homes and trade up to larger homes with bigger mortgage balances, a boom for the housing market.

The most recent unemployment data revealed that unemployment unexpectedly fell to a 50 year low this past month to 3.6 percent, the lowest since 1969. Historically, a low unemployment rate tends to drive consumer confidence higher and act as a buffer during economic uncertainty.

Canada, Mexico, and the United States introduced legislation that would replace the North American Free Trade Agreement (NAFTA) and establish a new trade treaty among the three countries to be referred as the U.S.-Mexico-Canada Agreement (USMCA). Existing tariffs on steel and aluminum imports from Canada would be eradicated. Canada is the second largest foreign supplier of steel and aluminum to the United States.  (Sources: Dept. of Commerce, Treasury Dept., Freddie Mac, IMF)

 
$10.6 trillion worth of global debt is now in negative yielding territory

Rates Drop Rapidly Amid Inverted Yield Curve – Fixed Income Update

Markets tend to look at the yield curve in order to find clues as to what the expectations are about future economic growth and inflation. The yield curve is essentially the current yield on government Treasury bonds from 3-month maturities to 30-year maturities. At the end of May, the 1, 2, 3, 6 month and 1-year notes all yielded more than the benchmark 10-year bond. When shorter term bonds are yielding more than longer term bonds, it is known as an inversion or inverted yield curve.

Economically sensitive copper and oil prices fell in May, perhaps signaling weaker global growth activity. Such dynamics in the commodities market tends to push yields lower internationally. Some analysts believe that a continued escalation of trade disputes with countries in addition to China will crimp global economic growth and force the Federal Reserve to lower interest rates.

Total global debt as of the end of 2017 was $184 trillion, as monitored by the International Monetary Fund (IMF). Global bond yields fell in May with an estimated $10.6 trillion worth of debt now in negative yielding territory, the highest since 2016.

Some fixed income analysts are projecting lower yields later this year due to slowing economic expansion, continued demand for U.S. government debt, and an increasing probability that the Fed will eventually lower rates. (Sources: IMF, Treasury Dept., Federal Reserve)

Equities Give Up Early Gains – Equity Market Update

In stark contrast to the strong performance during the first four months of 2019, U.S. equities faltered in May as continued trade disputes hindered economic growth expectations. All sectors of the S&P 500 Index fell in May, with the exception of Real Estate. Technology and financial stocks experienced the brunt of the pullback in May.

May was the worst month since December 2018, when markets reacted to heightening trade fears and a possible rate hike by the Federal Reserve. Ironically, some analysts are expecting a reduction in rates by the Fed later this year in response to tariff reverberations and slowing economic global growth. A rate decrease by the Fed might lure equities higher as loan costs and capital remain inexpensive, thus buffering profit margins for U.S. companies.

Should a continued drop in rates persist, economists note that the U.S. dollar may weaken, thus boosting U.S. multi-national company earnings, which primarily operate internationally.

Global inflation expectations have eased considerably over the past month, prompting central banks in various countries to consider lowering rates, also known as growth stimulus efforts. (Sources: S&P, Bloomberg, Federal Reserve)

 
A child born in the US in 2015 will cost an average of USD$350k before college

Down Trash – Environmental Fact

As an abundance of trash is generated every day, more of an effort is being made to collect and recycle as much trash as possible. Several nations worldwide have had growing success in collecting and recycling their trash over the past few years.

Switzerland currently recycles over 50% of its trash with Austria, Germany, Netherlands and Norway recycling over 40% of their trash. In the United States, the Environmental Protection Agency (EPA) has been monitoring and collecting data on U.S. trash for over 30 years. In its most recent figures, Americans generated about 262 million tons of trash in 2015 and recycled 91 million tons of it, equivalent to a 35% recycling rate. The EPA estimates that Americans produce an average of 4.48 pounds of trash individually every day. That equates to roughly 1635 pounds of trash each year for every American. The EPA’s objective is to try to find new ways to efficiently and effectively recycle as much of this trash as possible.

The challenges with recycling trash is the multitude of components found in everyday trash and how best to separate them. Known in the trash industry as municipal solid waste (MSW), common everyday trash is comprised of food, waste, grass clippings, sofas, computers, tires and refrigerators. Fortunately, more and more of these items are being broken down for selective recycling of internal components, both hazardous and non-hazardous.

Most individuals and every type of entity in the country contributes to the trash pile, including individual homes, apartments, businesses, hospitals, and schools. Optimistically, current data from the EPA is telling us that both individuals and businesses are producing less trash than we were 10 years ago.

So where does so much trash go? Most of it ends up in landfills. The number of landfills in the United States has declined over the past few years, yet the average landfill size has increased. On a national basis, landfill capacity is sufficient for current levels of garbage, but it is limited in certain regions of the country  (Source: Environmental Protection Agency)

The Cost of Raising Kids – Financial Planning

Since 1960, the U.S. Department of Agriculture (USDA) has provided estimates of expenditures related to raising a child from birth to age 17. Related expenses range from food and housing to education and medical care. The USDA closely follows and identifies the various incomes for families, as well as the number of children in families. What it has determined over the past 55 years of collecting data is that families with different incomes spend differently on their children. In addition, single parent families spend less than dual parent families who have the ability to afford greater expenses in raising children. Certain expenses rise as children grow older no matter what income group a family might be part of. These expenses include food, transportation, clothing, and health care expenses. As children grow, they tend to eat more as well as spend more on transportation once they start commuting to more activities at ages 15-17. Childcare and medical expenses were generally higher for children under the age of 6.

The USDA estimates that a child born in 2015 will cost a dual parent family $349,380 from birth until high school graduation in 2032. (Source: USDA)

 
The U.S. imported $93 billion worth of vehicles from Mexico in 2018

Here’s What The U.S. Buys The Most Of From China – Trade Overview

In the past twenty-plus years, China has evolved from a heavy equipment machinery exporter to a prominent leader in technology product exports. Large international conglomerates have established an enormous manufacturing presence throughout China, utilizing its cheap labor and quick turnaround times. China’s manufacturing plants are among the most modern in the world, producing large capacities almost entirely for export.

As the world’s appetite for electronic devices has grown, so has China’s ability to manufacture and export these devices. As a product exporter, China is able to manufacture and export finished products worldwide. In addition, China is also an exporter of components, which may be used in the manufacture and assembly of products in other countries, such as the United States. By exporting components in addition to finished products, China is able to hedge against tariff issues and labor costs should they become a factor. (Sources: WTO, IMF, U.S. Dept. of Commerce)

 

What The U.S. Imports From Mexico – Trade Overview

The administration has proposed tariffs up to 25% on imported products from Mexico in order to stem illegal immigration from the country. Some argue that imposing such a tariff would make certain imported products more expensive for American consumers.

The U.S. imported $93 billion worth of vehicles from Mexico in 2018, with auto parts accounting for the single largest type of product imported from Mexico valued at over $51 billion in 2016, making the automotive industry an integral component of trade with Mexico. Interestingly enough, exports headed from the U.S. to Mexico are primarily for use in the automotive industry, with machinery, fuels, and plastics making up the largest portions.

Agricultural and food products imported from Mexico, such as vegetables, fruit, snack foods and alcohol, totaled over $17 billion in 2018. Mexico is currently the world’s largest exporter of beer, exporting $3.6 billion of the alcohol to the U.S. in 2018. Proposed tariffs on Mexican imports are expected not to take effect until June 10th in order to give Mexico ample time to respond or negotiate terms. (Sources: Dept. of Commerce, BLS, Office of the U.S. Trade Representative)