Markets, Economy

Weekly Kickstart (05/13/2019-05/17/2019)

5/13/19, 8:00 AM

iStock-626627280.jpgStocks were under pressure last week, as the S&P 500 fell by 2.18 percent to 2,881.40. That still left the benchmark index up 14.94 percent 2019-to-date, and just 2.19 percent below the all-time closing high. A key catalyst for last week’s selloff was the sudden escalation in trade tensions between the United States and China. Specifically, a breakdown in negotiations caused President Trump to raise the tariff rate to 25 percent from 10 percent on $200 billion of imports from China, and promise a comparable hike on remaining imports in the future. These large increases are an example of the strong enforcement mechanisms that could be required for any eventual trade agreement to be meaningful given China’s long history of breaking promises to the West. Ultimately, though, the goal should be to reduce tariffs all the way to zero on both sides because a prolonged, retaliatory trade war can raise inflation and be an overall drag on economic growth.

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However, with no immediate resolution in sight, stocks will likely remain very sensitive to every incoming headline about developments in the negotiations, especially with most major indices still relatively close to record highs even after four consecutive months of solid returns. Moreover, heading into last week the S&P 500 was sitting on a year-to-date gain of 17.50 percent, the best start to a year since 1987. Going back to 1928, more than three-quarters of the years that experienced similarly strong performance during the first 85 trading days not only held onto their earlier gains but added to them by yearend. Clearly strength begets strength in the stock market, but even a favorable historical bias does not necessarily mean it will be smooth sailing for investors during the rest of 2019. Indeed, the S&P 500 has posted a positive annual return in 29 of the past 39 years, with an average gain of 8.4 percent. During this same period, though, the broad index has also experienced an average intra-year drawdown of 13.9 percent, whereas the largest peak to trough decline in 2019 so far is just 2.55 percent. That is abnormally low, so it would not be surprising to see even higher volatility and larger drawdowns at some point during the remainder of the year. Any retail investors unsure how to navigate this environment should consider consulting with a professional financial advisor and as always, we are here to help with any questions you may have.

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To recap a few of the things we learned about the economy last week, the positives included that mortgage applications rose, the number of job openings jumped, total vacancies exceeded job seekers for the 13th consecutive month, Americans’ confidence in the labor market improved, and both wholesale and household inflation pressures remained muted. As for the negatives, the nation’s trade deficit widened, initial jobless claims have yet to pullback from the recent holiday-related spike, and credit demand in the U.S. continued to soften. This week the pace of economic data picks up slightly, with a few important reports on housing, manufacturing, consumers, and small business scheduled to be released.

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**A more detailed snapshot of the U.S. economy can be found here.**

What To Watch:

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Sources: Econoday, Bloomberg, Wells Fargo, WSJ, Twitter, FRBSL

Post author: Charles Couch

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