As expected, U.S. equity markets attempted to hold their respective 200 DMAs last week. That attempt was directly impacted by President Trump’s announcement on Friday that he would impose 5% tariffs on all of Mexico’s exports into the United States. Additionally, increasingly hardened stances by U.S. and Chinese officials on trade continue amplify fear of the unknown. The net result was a sharp trade lower across nearly every sector of all three major indices. There were some relative exceptions –– specifically found in dividend-rich utilities and in several software companies that reported quarterly results last week. Otherwise, it was a brutal week for those long the market. May’s monthly performance was the worst of its kind since the ’60s.
As the charts below clearly illustrate, of the four trading sessions last week, there was one day that markets did not register losses. Volume on that day was meager in comparison to the institutional engagement found on the three other trading days of the week. Volume accompanying the selloff last week rose versus the 50-day moving average for all three indices.
As you would know if you have been reading this note for any amount of time, I tend to take positions counter to prevailing wisdom, which may have something to do with having been an active participant in U.S. equity trading since the Dow Industrials were trading in the 700s. I have seen conventional thinking turned upside down so many times that I have developed a rather cynical take on what becomes conventional thinking.
When trades become conventional, when opinions are nearly universally-shared, when taking an unconventional position feels uncomfortable, that is precisely the time to give it thoughtful consideration. My call to double down on longs in the waning weeks of December 2018, and my call rotate into a more defensive portfolio posture in May, are cases in point.
With that as a backdrop, I would like to take the other side of this current trade lower, though I cannot. There are simply too many headwinds for markets –– not the least of which is the calendar. Equity markets tend to become untethered to data in the waning periods between earnings seasons. In that void, geopolitical themes rise and tend to disrupt complacent market sentiment.
U.S./China trade is a case in point. So is U.S./Mexico trade. Both of these themes have the potential of driving significantly greater anxiety into markets’ phycology/sentiment. With all three major U.S. equity market indices well off their respective 52-week highs, you may think there is a reason to do some value shopping; and there may be, but fear of the unknown, or “Knightian Uncertainty,” will remain the principal driver for the near-term.
With that driver in place, value is difficult to measure. It is, however, safe to say the technical setup for this week remains risk-off. That becomes even more the case if we see U.S. equity markets drop 10% from their 52-week highs –– which could well happen this week.
That would spell “correction”. A correction with so many undefined variables still at-play in the market may well lead to an extended period of choppy trade with a decidedly negative pricing bias.
One thing we know without question is that conventional wisdom overlooked the potential impact of a trade impasse –– specifically with China. I honestly think that most on the street still don’t fully grasp the nature of the impasse we face. It has thus far been framed in purely economic terms. That is a mistake.
Both the trade challenges with China and Mexico will increasingly take on a stridently political nature.
It is there –– in the political sphere –– that trade issues can take on an impact that far outlasts their economic sense. I fear we are headed in that direction. If we are, expect the ticker tape to be dominated increasingly by tweets rather than indications of volume and last sale.
This Week’s Economic Calendar:
This week’s economic data releases of greatest potential impact on markets include the release of May’s ISM Manufacturing Index by the Institute Of Supply Management on Monday. As you likely remember, April’s reading was a healthy 52.8. Econoday consensus is calling for a nearly unchanged reading of 52.9 for May.
We receive motor vehicle sales and factory order data on Tuesday. On Wednesday, the ADP Employment Report for May is released. Often looked upon as a directional or thematic harbinger for what to expect in the Monthly Employment Report, Econoday is calling for a gain of 175k versus April’s stronger than expected 275k. Also on Wednesday, we receive the weekly EIA Petroleum Status Report. We have seen relative stability in inventory stockpiles in recent reports. Last week’s inventory changes for the week ending 5/31, were nearly non-existent. Crude inventories slipped marginally at -0.3 M bbl. Gasoline inventories rose by 2.2 M bbl and distillates contracted by 1.6 M bbl.
As is normally the case, Thursday carries the bulk of data releases. Given the paramount importance of international trade in the current market environment, the significance of April’s International Trade data will be closely combed over. Econoday consensus is $-50.7 B. March’s results reflected a trade imbalance for the U.S. of $50.0 B. Weekly Jobless Claims have been consistently encouraging. For the week ending 6/1, Econoday is expecting an unchanged weekly reading of 215 K. The 4-week moving average –– level stood at 216.75k last week.
Finally, on Friday, we receive the Monthly Employment Report for May. April’s report sparked the last vestige of enthusiasm on the part of inventors in nearly a month. It came in significantly stronger than expected at 263 k. Those monthly employment gains allowed the official unemployment rate to drop to a cycle-low of 3.6%. Econoday is expecting May’s Employment Report to reflect more modest employment gains. Non-farm payrolls are expected to expand by 180 k. The unemployment rate is expected to tick up to 3.7%. Manufacturing payroll gains are expected to be a modest +6 k. Very significantly, the Labor Force Participation rate is expected to remain unchanged at 62.8%. If, as I expect, May’s Employment Report frames the state of our economic expansion in a constructive light, look for it to provide a degree of counterweight to the increasingly crowded risk-off and trade-centric trade.
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