Every month, Personal Capital Chief Investment Officer Craig Birk reviews the major market-movers: what’s moving the markets? What should you be aware of for the coming month?
The rally in global equity markets ran out of steam in May. Stocks retreated on renewed trade conflict fears as highly anticipated talks between the US and China broke down. The month ended with increases in both real tariffs and rhetoric. International stocks once again proved to be somewhat more resilient in down periods, in part due to lower exposure to technology.
The Trade War With China
Widespread optimism for a trade deal with China proved premature. Both sides accused the other of retreating from previously agreed to points. As a result, the US increased tariffs on about $200 billion of goods from 10% to 25%. Tensions were raised again when the US blacklisted Huawei, a leading Chinese communications equipment company, citing national security. The month ended with both sides expressing desire for a compromise but no concrete next steps. In our view, there is a significant difference between 10% and 25% tariffs, and the trade war will now start to take a more meaningful bite out of global economic growth. Still, we think it is a mistake to overestimate the impact of one factor, especially given the fluid nature of the situation. Headwinds do not equal recession.
The Status of Tech Stocks
At the start of June, the Department of Justice and Federal Trade Commission announced they would split duties to investigate antitrust issues at Google, Apple, Amazon and Facebook. Tech shares dropped on the news but recovered quickly. Given the widespread desire for the services of these companies, we don’t see much threat of meaningful regulation in the near-term. However, the rapid pivot in sentiment against big tech in Washington illustrates that there is a ceiling on how big these companies will be allowed to grow. Those betting on years of rapid growth should take note. These developments are illustrative of the natural functions which cause sector leadership to rotate and prevent any one part of the market from being “better” for too long.
The Fed Indicates Openness to Rate Cuts
Another recent development was Fed comments indicating it would be open to rate cuts if needed. The justification was the possible impact of trade conflict on growth, but the bigger issue may be that the Fed is worried about a prolonged inverted yield curve. A flight to safety in May drove the 10 year Treasury to 2.1%, which is below prevailing short term rates. Markets immediately cheered the central bank comments, but for those with a longer term view we believe it would be concerning if the Fed feels the need to start lowering rates again.
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