Key Points
  • U.S. stocks suffered a 7-10% pullback throughout May as trade tensions and growth concerns heated up. The selling was disconcerting and bouts of weakness could persist, but potential opportunities may also emerge.

  • Warning signs are increasingly flashing for economic growth, while recession probability models have been moving higher; but for now we believe the bar remains relatively high for Fed rate cuts this year—although futures have priced in a 80% likelihood by July.

  • Elevated consumer confidence in the world’s economic leaders may not be painting an accurate economic picture.

“Though patience be a tired mare, yet she will plod.”
― William Shakespeare

Danger rising, potential opportunities emerging?

May saw equities pull back between 7-10% as trade tensions and growth concerns ratcheted up. After a solid rally since the early-June lows, the question now is: Is there more weakness to come?

We never try to time every near-term peak or trough in stocks; but we are concerned some of the issues which have rattled the market could get worse. First, the trade dispute with China could escalate even further as the United States is looking at imposing tariffs on the remaining ~$325 billion in Chinese goods that U.S. companies import. Additionally, trade talks with Europe have deteriorated recently and the threat of U.S. tariffs on all Mexican imports were dual escalations in the global trade battle. Due to tariffs’ growing impact, as well as weak global growth, S&P 500 earnings estimates for the second quarter have been in retreat—Refinitiv now shows a negative year-over-year earnings expectation. In addition, a historically fairly reliable predictor of recessions has flashed yet another warning; with the yield curve inverting again (well-outlasting in duration the brief inversion in March). This has fed into the Atlanta Fed’s GDPNow estimate for second quarter growth, which has moved down to a meager 1.5%; while the NY Fed’s recession probability model is up to 30%, the highest since the last recession.