After The Close - Stocks slumped notably from the opening bell on Friday, after word yesterday that President Trump threatened to impose tariffs on imports from Mexico within two weeks if our southern neighbor does not do more to stop the flow of undocumented immigrants to the United States.
That announcement took investors by surprise, and the increased uncertainty was poorly received. The thinking had been that trade issues with Mexico were essentially being resolved through a revised NAFTA agreement pending in Congress.
Shares of automakers and auto parts makers were among the hardest hit by the possibility of a fresh round of tariffs on Mexico, since they conduct sizable business in that nation. The proposed tariffs could escalate, too.
While stocks fell on the news, the bond market continued its impressive rally as investors fled into the perceived safe haven of government obligations. The yield on the benchmark 10-year Treasury note fell to a slim 2.14% on the day, from 2.23% at yesterday’s close, with prices moving up on higher demand.
More broadly, interest rates have been falling for much of 2019 on the expectation that GDP acceleration will ease. True, revised first-quarter GDP came in at a strong 3.1%. But there is an assumption that the figure was padded by inventory stockpiling, as businesses sought to get ahead of tariffs and potential disruption to their supply chains. Second-quarter GDP growth is widely expected to slow to around half the rate registered in the first three months of the year.
Meanwhile, there is a line of thinking that the decline in long-term interest rates will presage a drop in the short-term rates controlled by the Federal Reserve. The Fed is currently being patient, assessing economic data and the bigger picture, but may well be inclined to lower rates before yearend if weakening business trends do, in fact, become a reality.
Wall Street would probably welcome a rate cut by the Fed, but the price to be paid is likely a degree of discomfort along the way. Falling bond yields and slumping oil prices could be pointing to slower growth ahead, and perhaps less-than-counted-on corporate profits.
At the close, the major indexes were all deeply in the red. The Dow Jones Industrial Average was 355 points lower; the NASDAQ was down 115 points; and the S&P 500 dropped 37 points.
Stocks fell for the week as a whole and, for the first time this year, on a monthly basis during May. - Robert Mitkowski
At the time of this writing, the author did not have positions in any of the companies mentioned.
Before The Bell - The merry month of May will conclude in a few hours from now. However, as far as investors are concerned, it has been anything but merry. Indeed, the major indexes all sport losses for the latest month, with the overall declines only getting larger this week in spite of the firming in the market yesterday. The inability to fashion a trade détente with China and growing fears that the sudden plunge in short- and intermediate-term Treasury issues could presage a recession in the years ahead, have been instrumental in turning the market lower this month.
Meanwhile, on this penultimate day of the week and month, stocks got off smartly with help from a reassuring government report on revised first-quarter GDP growth. Specifically, the Bureau of Economic Analysis reported that opening-period GDP growth had been revised downward, but only from 3.2% to 3.1%. The new estimate, based on more complete source data, reflected a downward revision in nonresidential fixed investment and private inventory investment, but upward revisions in exports, which already had been strong. We expect a deceleration of growth, into the 2.0%-2.5% in the current quarter.
So, armed with this solid GDP report, stocks started the session out nicely in the black, with the Dow Jones Industrial Average quickly gaining some 90 points. The advance in the tech-driven NASDAQ was even stronger on percentage basis. Then, a report showing a unexpected drop in pending home sales dimmed the upturn briefly, but the market still regrouped and moved decidedly to the upside once again, so that as we passed the one-hour mark of the trading day, the gains had been solidified once more. A rise in bond yields, to 2.27% on the 10-year Treasury note, also helped sentiment.
The market then continued its winning way over the balance of the morning. A solidifying in the banking group, a recent market casualty, also helped the bullish cause. However, continuing harsh rhetoric out of China, in particular from its Vice Foreign Minister, did not help the bullish case and such contentions helped to cap the morning's gains. Still, this was shaping up as a fairly good day, overall, for the bulls, who have had their struggles this month. But sentiment then seemed to shift modestly as we hit the noon hour in New York, as the Dow eased modestly into the red, along with the smaller averages.
Wall Street then would spend much of the remainder of the session going back and forth from modest losses of up to 60 points in the Dow Industrials to gains of 70 to 80 points in that composite. That narrow range would be replicated in the S&P 500 Index and the NASDAQ. Overall, the market was negative for more of the time than positive until the last half hour when we did see some modest buying that brought much of the market back into the green into the close. It was a seesaw pattern with no real conviction as investors awaited the next set of data on the economy, headlined by next week's reports on manufacturing and employment.
At the close, the Dow Industrials would be up by 44 points; the S&P 500 Index was better by six points; and the NASDAQ was ahead 20 points. The small-cap Russell 200 eased back somewhat, as did the S&P Mid-Cap 40. Advancers and decliners, meanwhile, were fairly close to one another, while Treasury yields on the 10-year note were off somewhat. Altogether, it was an unprepossessing performance by the bulls. Now, we look ahead to the closing session of May, a month that we indicated will likely show moderate declines.
As to this pending final session, the major indexes were sharply lower in overnight dealings across Asia, while in Europe, the bourses are moving down aggressively, as well. Also, Treasury note yields are off once again and oil prices are falling anew. All of this is leading up to a markedly weaker opening on Wall Street when trading resumes this morning. The seeming cause of the latest reversals was the President's indication that he may threaten the NAFTA deal by imposing new tariffs on Mexico. - Harvey S. Katz, CFA