As the month wound down, so did stocks. Pronouncements from Washington dominated the market’s direction on a daily basis. We can expect to see that trend continue as the summer doldrums reduce liquidity and exaggerate market swings.
The adage of “sell in May,” however, did not fulfill the bears’ expectations this year. Actually, the month of May has been pretty good for stocks recently. The S&P 500 Benchmark Index gained a smidge over two percent for the month this year. That’s not to say those gains were easy. The stress level for those who are trying to trade this market is through the roof.
And that’s because two opposing trends are impacting the financial markets. The first is short-term volatility caused by political events. At the moment, these are mostly trade-related: tariffs and counter-tariffs, NAFTA concerns, and China trade. All of the above have generated a war of words (or tweets) and, depending on someone’s mood in the morning, can spark 1-2% movements in the index in either direction. The falsehoods, about-turns, and misinformation have day traders going crazy.
And don’t forget the international events. This week, Italy dominated trade, as a political/financial crisis may be brewing in Europe’s fourth largest economy. A new prime minster, Guiseppe Conte, was appointed Friday as an uneasy coalition of populists and right-wingers agreed to compromise in the wake of a severe financial downturn in Italian financial markets this week.
We will wait for future developments (see my column published yesterday on the subject) before giving the green light to Italy and Europe. At the same time, the Trump/Kim show continues. The off again, on-again charade is accomplishing what both egomaniacs want most: more time in the limelight.
Then there is the longer-term trend, which centers on real fundamentals: unemployment, inflation, interest rates, global growth and the like. All of these indicators are still flashing positive for the stock market. As readers know, I have been urging investors to focus on that trend and ignore the noise caused by all the short-term, head line grabbing events.
Take today’s much-heralded employment report. The U.S. unemployment rate has just hit an 18-month low at 3.8%. We haven’t had a lower rate since the year 2000. Wage growth came in at 2.7% compared to a year ago. That is a stellar performance, no two ways about it.
This report, however, was marred by controversy. Prior to its release, Donald Trump tweeted a “heads-up” that he was “looking forward to seeing the employment numbers at 8:30 this morning”—obviously a tip that the numbers would be good.
Federal rules (as Trump knows but ignored) state that no one in the executive branch can comment on major economic reports until an hour after they are released. Since few individuals (but almost all institutions) trade in the hours before and after the markets open, Trump’s comments enabled bond, currency, and stock market futures traders at big institutions to profit from this information.
At the end of the day, what matters is the economic trends, and right now the trends are your friends. Until the data say otherwise, investors should remain invested, ignore the short-term volatility traps and enjoy the summer.