Art Hogan’s Week in Review – May 31, 2019

May 31, 2019

Week in Review

The month of May has been a rough ride. With the pullback for the month at about 6.5%, it will stand as the first monthly decline of 2019, and the worst month of May since 2012. The collapse of the US-China trade talks certainly acted as the main catalyst to start the pullback. It is also important to remember that we were up about 25% from the December 2018 lows heading into the second quarter. It is also important to recognize that historically markets have an average of three 5% pullbacks every year. Pullbacks and corrections are a normal part of market cycles. The addition of a possible second trade war with Mexico has added more market uncertainty to the already negative market sentiment.

The market reaction over the course of May has had a certain amount of logic to it when we step back and examine some of the sector and company drawdowns. The Philadelphia Semiconductor index is off 16% for the month of May. The chipmakers are seen as the tip-of-the sword in the US-China trade battle. In the ABC’s of China exposure: Apple is off 11.6%, Boeing is down 9%, and Caterpillar is lower by 12.9% for the month of May. 3M and Intel are off 14.8% and 13.3%, respectively in May. The market tends to show a modicum of efficiency in doling out the punishment that fits the crime. The more China exposure a company has, the larger the May drawdowns have been.

Highlights for the week:

Robert Mueller cited a Justice Department policy barring the prosecution of a sitting president for a federal crime. “That is unconstitutional,” Mueller said. “Charging the president with a crime was, therefore, not an option we could consider.” He went on to say that “if we had had confidence that the president clearly did not commit a crime, we would have said so.”

On the elongated US-China trade front, the rhetoric is rising as the biggest Chinese newspaper, the People’s Daily, ran a story on Wednesday titled “United States, don’t underestimate China’s ability to strike back.” The publication is the official newspaper of the Communist Party of China. The story goes on to say “We advise the U.S. side not to underestimate the Chinese side’s ability to safeguard its development rights and interests. Don’t say we didn’t warn you!”

While stocks have been on sale for five weeks now, US Treasuries have been bought. The month of May has seen the yield on the 10-year Treasury note drop over 30 basis points (from over 2.5% to around 2.142% at the close on Friday .)

The second read on first-quarter U.S. GDP showed the economy expanded by 3.1% The 3.1% print topped a Dow Jones estimate of 3.0%.

The Atlanta Federal Reserve is forecasting gross domestic product rising at a 1.3% pace for the second quarter

President Trump tweeted that he “will impose a 5% tariff on all goods coming into our country from Mexico,” which will gradually increase “until the illegal immigration problem is remedied.”

Catalysts for the week ahead:

Monday:

China May manufacturing PMI, and May vehicle sales – all out Sun night/Mon morning), US Markit manufacturing PMI for May (9:45 am ET), US manufacturing
ISM for May (10 am ET), US construction spending for April (10 am ET), US auto sales for May, Fed speakers (Barkin and Bullard), and earnings (BOX and COUP after the close).

Tuesday:

US factory orders for April (10 am ET), Powell’s opening remarks at the Fed inflation framework conference, analyst meetings (CSOD and CVS), and earnings (CBRL, DCI, GSM, LE, NAV, and TIF before
the open and AMBA, CRM, GME, GWRE, HQY, NX, and PVTL after the close).

Wednesday:

Eurozone services PMI for May (4 am ET), the Eurozone PPI and retail sales for April (5 am ET), US ADP jobs report for May (8:15 am ET), the US Markit services PMI for May (9:45 am ET), the US non-manufacturing ISM for May (10 am ET), the Fed Beige Book (2 pm ET), analyst meetings (BIIB, PRU, and SHW), and earnings (AEO, CPB, SCWX, and VRA before the open and ABM, GEF, FIVE, MDB, SFIX, and UNFI after the close).

Thursday:

RBI decision (2:1 5am ET), the ECB decision (7:45 am ET press release and 8:30 am ET press conf.), US nonfarm productivity/unit labor costs for Q1 (8:30 am ET), the US trade balance for April (8:30 am ET), Fed speakers
(Kaplan and Williams), and earnings (CIEN, HOME, HOV, KIRK, MIK, SAIC, SIG, and SJM before the open and DOCU, MTN, and OLLI after the close).

Friday:

China FX reserves for May (Thurs night/Fri morning), the US jobs report for May (8:30 am ET), US wholesale trade sales/inventories for April (10 am ET), US consumer credit for April (3 pm ET), and analyst meetings (WMT and WTM).

The views and opinions expressed herein are those of the analyst Arthur Hogan and are current as of this report’s posting date. This commentary is general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. Neither Art Hogan nor National Securities Corporation is affiliated with the issuers mentioned herein, and no part of this analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the analyst in the report. The views & and strategies may not be suitable for all investors and is are not intended to be relied on for legal or tax advice. Please note that any investment involves risk including loss of principal.