Not Yet Confirmed

After writing last month on the lack of confirmation of the April new highs in the S&P 500 and the NASDAQ (by not confirmed, I mean other market indexes lagged and did not set new highs concurrently), the markets did get together to move in unison in May.  However, instead of moving higher to new high territory across the board, worldwide equities hit the skids, declining together.

The early-June bounce might be the start of another rally to new highs that could end up with more indexes confirming; however, the longer we go without confirmation, the more likely we have seen a major top.  We will keep watching.

Trade War – Flight to Safety

The big news upsetting the markets during May was the sharp, and unexpected deterioration in trade issues with two of our biggest trading partners – China and Mexico.  I won’t rehash as so much has been written already by more knowledgeable people than me.  However, I do have a couple of observations:

1. Markets react to the unexpected.  The markets tend to quite effectively discount the future as investors collectively try to determine based on current information and informed expectations how best to allocate their investment dollars.  Occasionally, surprises occur and these are the unexpected events that can trigger out-sized reactions.  Of course, they can be both positive and negative surprises. 
2. Volatility finally reconciled stock-bond relationship.  Many market pundits have noted the incongruence of falling interest rates (rising bond prices) at the same time that stocks had risen to all-time highs.  It seemed that bonds were predicting difficult economic times ahead requiring lower interest rates.  On the other hand, the rising values of equities seemed to point to good times ahead.  I would certainly not be ready to concede that the bond market story had won yet, but at least we are seeing some congruence with the flight-to-safety into treasuries knocking 10-year yields down to nearly 2% during the stock correction. 

It was an interesting, volatile May to say the least.  The volatility may very well continue and, as always, we advise staying calm and continuing to follow your well-thought-out investment strategy.