Despite political drama in Italy and continuing trade friction, stocks posted their best monthly performance since January.
The Dow Jones Industrial Average rose 1.05 percent while the Standard & Poor’s 500 picked up 2.16 percent. The NASDAQ Composite led the way, surging 5.32.1
Trade talks between the U.S. and China dominated investors’ attention in early May. Positive comments by U.S. negotiators caused stocks to rise, but they later fell in response to China’s threat to end soybean imports. Strong earnings and economic data managed to break through this trade noise, pushing stocks to finish the first week on a strong note.
Stocks continued posting healthy numbers, moving into positive territory year-to-date thanks to eased inflation fears and a renewed focus on positive earnings.
After stocks moved lower under pressure from rising yields, the market turned choppy as it reacted to conflicting statements on China trade progress, the cancellation of the planned summit meeting with North Korea, and comments from President Trump about the possibility of instituting tariffs on imported cars.
With the stock market faltering under the weight of trade worries, news that Italy was unable to form a governing coalition put pressure on markets worldwide. With Italy’s election unresolved, investors worried about Italy’s possible exit from the EU, and the repercussions such an event may have on the European banking system and the value of the Euro.
U.S. stocks did not escape the global downdraft but did bounce back the following day. However, much of this was quickly surrendered on the news that the U.S. would impose tariffs on steel and aluminum from Mexico, Canada, and EU countries.
The increase in the S&P 500 Index was broad-based with gains posted in Consumer Discretionary (+2.48 percent), Consumer Staples (+0.04 percent), Energy (+3.78 percent), Health Care (+1.29 percent), Industrials (+4.58 percent), Materials (+2.91 percent), Real Estate (+2.56 percent), and Technology (+6.75 percent). Losses were experienced by Financials (-0.15 percent) and Utilities (-1.26 percent).2
What Investors May Be Talking About in June
Of the energy Americans consume, 66 percent comes from oil and natural gas. So, it's no surprise that investors keep a close eye on oil prices.3
The price of West Texas Intermediate oil, which serves as a benchmark for oil pricing, began a long descent from $107 per barrel in June 2014 to a new low of approximately $26 per barrel by February 2016.4 Since then, the price of oil has climbed steadily, crossing the $70 per barrel mark in May.
So far, this gradual recovery appears to have left economic growth unharmed. In fact, the rebound in oil prices may even be a tailwind for the stock market as oil profits supported higher capital expenditures, increased hiring, and demand for energy-related services. However, this upward trajectory was abruptly interrupted by news that Saudi Arabia and Russia may increase output, leading to a sharp sell-off and prices dipping below $70 per barrel.
If oil prices do resume their upward march, they could sap consumers’ discretionary income and accelerate inflation, which in turn could cause the Fed to pursue a more aggressive rate hike policy.
With OPEC nations meeting on June 22, investors will be looking to see whether oil production targets will be raised, and by how much. Curiosity will focus on whether targets rise just enough to maintain oil’s current price level, or whether additional output amounts will emerge to drive prices lower.
Political turmoil in Italy and a weakening global economic outlook led to declines in most overseas markets, with the MSCI-EAFE Index sliding 3.02 percent in May.5
European markets focused on the political events in Italy, the overhang of trade tariffs on exports to the U.S., and softer economic data. Italy was hit hardest, dropping more than 13 percent.6
Losses in Pacific Rim markets were more modest, with Hong Kong slipping 1.1 percent and Japan falling 1.3 percent.7
Gross Domestic Product
Economic growth in the first quarter was revised lower by 0.1 percent to 2.2 percent. But compared to the first quarter of last year, the economy expanded by 2.8 percent, the highest annual growth rate in nearly three years.8
Employers added 164,000 jobs in April, lowering the unemployment rate to 3.9 percent, its lowest since December 2000. This marks 91 straight months of job increases, making it the longest job expansion on record. Despite the tightening labor market, wage growth remains modest, rising just 2.6 percent in the last 12 months.9
Consumer spending rose 0.3 percent in April, a pick-up in sales that analysts attributed to modest wage growth and the tax cuts showing up in higher take-home pay.10
Industrial production jumped 0.7 percent, the third straight month of increase in output. Capacity utilization–a measure of output relative to full output potential–rose by 0.4 percentage points to a 78 percent utilization rate, the highest level in three years.11
Housing starts dropped 3.7 percent, though the general trend remains positive with a gain of 9.1 percent year-to-date.12
New home sales fell 1.5 percent as the combination of a shrinking inventory and higher mortgage rates depressed buyer interest.13
Sales of previously owned homes sagged 2.5 percent, weighed down by rising prices, diminishing inventory and higher mortgage rates.14
Consumer Price Index
The price of consumer goods rose 0.2 percent in April, though core prices (excluding the more volatile energy and food categories) increased just 0.1 percent. For the last 12 months, the CPI has risen 2.5 percent.15
Durable Goods Orders
Orders of goods designed to last three years or more fell 1.7 percent, dragged lower by a sharp drop in the volatile civilian aircraft sector. However, business investment was strong, with non-defense capital goods (excluding aircraft) rising one percent.16
Minutes from the Federal Reserve Open Market Committee meeting ending May 2 indicated that officials are considering an increase in the federal funds rate in June.
The minutes also suggested that Fed officials were not concerned that wages might push inflation higher in the foreseeable future. Also, the minutes reaffirmed Fed officials’ belief that economic growth prospects remain strong.17
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- The Wall Street Journal, May 31, 2018
- FactSet Research, May 31, 2017
- American Petroleum Institute, 2017
- US. Energy Information Institute, 2017
- MSCI.com, April 30, 2018
- MSCI.com, April 30, 2018
- 7. MSCI.com, April 30, 2018
- The Wall Street Journal, May 30, 2018
- The Wall Street Journal, May 4, 2018
- The Wall Street Journal, May 15, 2018
- The Wall Street Journal, May 16, 2018
- The Wall Street Journal, May 16 , 2018
- The Wall Street Journal, May 23, 2018
- The Wall Street Journal, May 24, 2018
- The Wall Street Journal, May 10, 2018
- The Wall Street Journal, May 25, 2018
- The Wall Street Journal, May 23, 2018