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S&P 500 declines 2.2% as U.S.-China trade talks end without a deal

I learned early that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. I’ve never forgotten that. – Jesse Livermore

With first quarter earnings season winding down and no significant economic data last week, the market focused on trade between the U.S. and China and the results weren’t pretty. Both the S&P 500 Index and the Dow Jones Industrial Average lost about 2% while the Nasdaq Composite Index dropped 3% as no trade agreement was reached between the two countries by Friday’s close. Frustrated by the lack of meaningful progress on trade talks, President Trump threatened to impose additional tariffs on China, increasing them from 10% to 25% on $200 billion worth of Chinese goods. He claimed that China was backing away from previous commitments and said that the U.S. was losing between $600 and $800 billion a year in trade. A Chinese delegation met with U.S. trade officials Thursday and Friday in hopes of finalizing an agreement but, unfortunately, no deal was struck by week’s end. It was the 11th such meeting between the two countries. The threatened tariffs went into effect on Friday but included a grace period that exempted any increases on Chinese exports that were already in transit. China responded by saying that it would take necessary countermeasures to ensure that its interests weren’t adversely affected. Uncertain as to the possible outcome of the trade disagreement and concerned about its impact on earnings growth and consumer confidence, investors sold stocks believing that a lot of positives are already priced into the market. Although no deal was reached, Treasury Secretary Steven Mnuchin said that the trade talks were “constructive” and Chinese Vice Premier Liu He said that the talks “went fairly well”. The market was able to regain its footing on Friday by posting a modest gain despite the absence of a deal as markets remain optimistic that a deal will eventually be struck. After all, it’s in everyone’s best interest for a trade agreement to be reached, even if it takes longer than expected.

Last Week

After the Federal Reserve’s preferred inflation measure, the core personal consumption expenditures (PCE) index, showed benign inflation in March, inflation data reported last week was also less than expected. The April producer price index (PPI) rose modestly and the core PPI has increased 2.2% in the 12 months ended in April. The consumer price index (CPI) for April also edged slightly higher and the core CPI has risen 2.1% in the 12 months ended in April. Weekly jobless claims fell by 2,000 from 230,000 the previous week to 228,000 as the labor market remains strong.

For the week, the Dow Jones Industrial Average dropped 2.1% to close at 25,942 and the S&P 500 Index declined 2.2% to close at 2,881. The Nasdaq Composite Index fell 3% to close at 7,916.

This Week

Retail sales in April are expected to post only a modest increase after posting a big gain in March while leading economic indicators in April are expected to also increase but less than in the previous month. April housing starts should see a healthy increase over numbers reported in March and April import prices are forecast to rise appreciably due to higher gasoline prices. The preliminary May University of Michigan consumer sentiment index is expected to be strong once again.

Among the most notable companies scheduled to report first quarter earnings this week are Deere & Co., Wal Mart, Macy’s, Agilent Technologies, Cisco Systems, Applied Materials, Nvidia, Wageworks and Legg Mason.

Portfolio Strategy

There is an old Wall Street adage that says investors should sell in May and go away until late fall. Historically speaking, there is some merit to this adage as stock performance tends to be better in the six-month period from November to April than the six-month period from May through October. According to research compiled over the last 68 years, the average gain for the S&P 500 Index has been only 1.5% for the period from May to October compared to an average gain of 7% from November through April. While this data may be true, it also is a form of market-timing, which is very difficult if not impossible to do on a regular basis. Not only does an investor have to be right on when to get out of the market, but he also has to be right on when to get back into the market. After declining by 13% in the fourth quarter of last year, the S&P 500 has rebounded to post a gain of over 15% this year. Although the economy is approaching its 11th year of expansion, economic fundamentals continue to be mostly positive. Gross domestic product was 3.2% in the first quarter and even though growth is expected to slow in subsequent quarters, there is no recession in the foreseeable future. Corporate profits have been better than expected in the first quarter and will likely grow in the low to mid-single digit range for the year. European economies are also improving and China’s growth remains above 6% despite experiencing some softness recently. Job growth has been strong and unemployment remains low with modest wage growth. Inflation also has been running below the Federal Reserve’s target of 2%, almost ensuring that interest rates will remain unchanged for the balance of the year. For these reasons, investors should maintain their current equity exposure in accordance with an appropriate overall asset allocation plan based on their investment objective.