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Market Commentary for the week ending June 1st, 2019
- Stocks around the world suffered meaningful losses in May while bonds and gold gained
- Healthcare stocks are showing some signs of strength, as is common, during the market selloff
- Economic reports indicate a possible slowing economy while consumer confidence is near multi-year highs
Market Performance Summary
Notable Market Headlines
U.S. stocks have been leading the bull market in 2019 but were among the worst performers this week. Friday was the close of the month of May wrapping up a tough month for investors as nearly every market around the world was off -5% or more. Investors appear to be concerned about slowing economic growth worldwide combined with President Trump’s newly announced tariffs on products from Mexico starting at 5% and escalating to 25% if there is not progress along the border.
At the close on Friday U.S. large stocks, measured by the S&P 500, were down -2.6% for the week and -6.6% for the month of May. The other major market indexes fared no better during the month with the Dow Industrials off -6.7% and the tech-heavy NASDAQ falling -7.9%. Small U.S. stocks had an even worse week down -3.2% resulting in a -7.9% loss for May.
As rough of a month as this is, losses of this magnitude or more tend to happen about one of every ten months. We’ve had more than our fair share of such difficult months recently with October of last year down -6.8% and December falling -9.0%. Negative monthly returns bunched up together like this is not uncommon and fortunately have been accompanied by several strong monthly gains leaving all of these market indexes well in positive territory year-to-date in 2019.
International stocks were mixed for the week really helping investors with well-diversified portfolios. Developed markets fell -2.0% for the week while emerging markets actually posted a strong gain of +2.0%. Helping the average performance of emerging markets were big gains in both Turkey and Brazil, up +12.1% and +6.6% respectively. Furthermore, although the gain was much smaller, China’s markets were higher by +0.6%. For the month of May though emerging markets still posted a significant loss of -7.3% and are now holding onto a year-to-date gain of just +4.2%.
Gold has been a disappointment for investors in 2019, up just +1.7%, but this entire gain came this week helping investors with well-diversified portfolios mitigate some of the losses in their stock portfolio. Fortunately, this is exactly what we hope for during such period.
The other two alternative asset classes did not do as well. Real estate stocks lost -1.8% for the week but are holding onto an extremely impressive year-to-date gain of +14.4%. Commodities also were lower, down -5.0%, as the price of oil continues to fall on concerns of a weakening economy and too much supply.
Bonds also performed just as in investor would hope for when stocks are falling. For the week bonds gained +0.9% and are now higher by a respectable +3.8% in 2019. We would assume these higher prices were driven by investors seeking safety as well as expectations that interest rates may not have to be raised anytime soon due to a potential economic slowdown.
Healthcare stocks have been the worst performing in 2019 up just +1.4% while the S&P 500 is higher by +10.1%. That said, a couple of the biggest in the industry, pharmaceutical giant Pfizer (PFE) and health insurance goliath UnitedHealth Group (UNH), both had stocks that posted gains in May while the market fell sharply.
Investors generally perceive healthcare stocks to be more conservative and stable due to the assumption that people continue to need their products and services even during difficult economic times. As a result, you can see in the accompanying table that healthcare stocks nearly always hold up better during periods of market declines just as we’ve seen happen this May.
Constellation Brands (STZ), the maker of Mexican beers such as Corona and Modelo, is expected to see meaningfully reduced profits due to the new tariffs on Mexican imports. One Wall Street firm estimates that 75% of the company’s entire beer is imported from Mexico. This took a serious toll on the stock dropping -11.3% for the week but is still higher by +9.7% year-to-date.
Phillip Morris (PM), a company that manufactures and sells tobacco products outside the United States, is suffering falling industry sales. A new report came out showing U.S.cigarette volume sales fell -11.2% during the most recent 4-week period while other tobacco products also saw meaningful declines. This bad news for the company is combined with a recent lawsuit filed by Brazil’s attorney general. At the close of the week the stock was lower by -8.9%.
Economic Indicator - Reported
The revised report on first quarter Gross Domestic Product (GDP) showed the economy growing slightly slower than previously reported now at +3.1% compared to the original +3.2%. Although this was a revision lower it was better than economists expected. The biggest component of the economy, consumer spending, increased by only +1.3% during the quarter.
Consumer Confidence came in much stronger than economists had forecast with a reading of 134.1 in May compared to 129.2 the month before. This is a 6-month high and very close to record highs. The strong jobs market continues to fuel confidence while a spike higher in gas prices as little to dampen consumers’ optimism.
The rise in home prices persists but at the slowest rate in about 7 years. In the most recent month the S&P CoreLogic Case-Shiller 20-city housing price index inched up just +0.1% compared to the prior month and +2.7% during the past year.
Economic Indicators – Upcoming
The following economic data is expected in the coming week:
- Employment Report is expected to show 185,000 new jobs added in May
- Factory Orders are forecast to have fallen -0.9% in the most recent month
- Motor Vehicle Sales are expected higher to an annual rate of 16.9 million