Published May 31, 2019
At the beginning of this month of May we concluded our weekly blog with the following:
“Were smaller, riskier stocks to find strength, it would be a real boost to the market’s rally effort as there is clearly some “wall of worry” built into this market.”
By the end of the month, the market’s answer was clear: there would be no boost from small and midcap stocks. Instead, the rest of the market rolled over leading stocks to completely give back their nice April gains. The smallcap Russell 2000 index (below) shows the serious slide this part of the market has suffered . It looks much weaker than the broad market indexes like the S&P 500 and Nasdaq 100 (QQQ) would have you believe; those indexes hit new highs not long ago. The smallcap index never came close to hitting new highs during this rebound, perhaps not surprising as it came from a lower point of almost -30%!
However, the poster child for the market’s rollover has not been smallcap stocks. It has been the influential semiconductor sector. This group has been taken hostage by the uncertainty over a trade tariff resolution. The stock market has expressed its change in outlook for a deal by selling semiconductor shares down mercilessly. Of course, this group was also one of the biggest beneficiaries when positive trade chatter was the norm earlier in the year.
With neither the U.S. nor China talking like a deal is going to happen anytime soon, stock investors have pulled in their horns, sold off the big winners, and been unwilling to spread their investments to include riskier areas of the market. Global economic indicators have gotten worse, not better. Interest rates worldwide are rolling over, heading lower, in an expression of concern over the economic outlook. The wall of worry that we noted at the beginning of the month has only gotten bigger as the month has gone forward. Once again, as we’ve noted a few times this year, the China trade issue holds the key to the stock market’s outlook, and perhaps to the health of the global economy as well.
Another troubled week for stock investors as trade fears continued to overshadow all other factors. Stocks returned from Monday’s Memorial Day observation by losing -0.8% as President Trump indicated no urgency to finding a trade deal with China. A similar loss Wednesday with China noting that rare earth metals, critical in the manufacture of smartphones, might be restricted if the trade spat isn’t resolved. A slight reprieve Thursday led to only a +0.2% advance. Treasury bonds continued their recent slide in yields as investors seek safer choices in the bond market. A Thursday night note from President Trump threatening to impose tariffs on Mexico sent shares tumbling Friday. The loss of greater than -1% across all indexes sent the S&P 500 and Nasdaq 100 (QQQ) to their 200-day moving average, a place of key support it is hoped.
The S&P 500 (SPY) gave up the 2800 support level with a -2.66% weekly slip. It was the fourth consecutive week of losses. The May decline wiped out gains from March and April. The Nasdaq 100 (QQQ) dropped -2.36% while smallcap stocks (IWM) slumped to a -3.27% weekly loss.
Warm wishes and until next week.