Weekly Newsletter May 19th to May 23rd
RECAPPING LAST WEEK
Volatility returned as rising interest rates and fresh tariff threats sent U.S. equity indices lower for the week. The S&P500 and Nasdaq Composite index each slumped 2.5%, while the Russell 2000 tumbled 3.5%. International equities fared better, with the MSCI EAFE index posting a 1.3% gain. All S&P500 sectors finished in the red, with technology sliding 3.4% after the White House targeted Apple with a 25% tariff for iPhones sold but not manufactured in the U.S. The energy sector plunged 4% as crude oil prices remained under pressure from looming production increases. Gold futures jumped 5%, boosted by a sinking U.S. dollar and a new wrinkle in the trade wars—a proposed 50% levy on European Union goods. Bitcoin soared to a new record high near $112,000 before pulling back to end the week with a 5% gain. The continued selloff in longer dated U.S. Treasury bonds pushed yields up—the 30-year rate reached 5.15%, its highest level since 2007. A weak 20-year auction and concerns over rising budget deficits were contributing factors. Turning to economic data, U.S. business activity improved this month, although price pressures persisted. The S&P Global flash PMI composite index edged up to 52.1, lifted by a surge in new manufacturing orders. Sales of new U.S. homes rose 10.9% in April, spurred by lower prices and higher incentives for buyers. The increase in the median price of existing homes saw the slowest appreciation in nearly two years. In corporate earnings news, Home Depot missed profit expectations but stuck to its previous guidance numbers, while Target slashed its forecast after posting a sharp decline in same-store sales. Overseas, China’s industrial production increased more than expected last month, though weaker retail sales reflected continued domestic consumption challenges. China’s central bank reduced its benchmark lending rates for the first time since October as policymakers sought to buffer the economic impact from trade conflicts. The Reserve Bank of Australia cut rates by 25 basis points to 3.85%, and investors anticipate two additional cuts later this year. Japan’s core CPI jumped the most in two years, rising to 3.5% YoY in April and supporting a Bank of Japan rate hike in July. The UK also suffered a larger-than-expected inflation spike last month, potentially further slowing the country’s already gradual rate-cutting pace. Canada’s annual inflation rate fell to 1.7% as energy prices dropped, but core measures remained higher. Finally, the European Central Bank, in its Financial Stability Review, said a “fundamental regime change” could be underway, with investors reassessing the risk of U.S. assets. Business PMI surveys from the Eurozone showed a drop in services activity, previously the bloc’s main economic growth driver.
THE WEEK AHEAD
A shortened week awaits as U.S. markets were closed on Monday for the Memorial Day holiday. Investors will return from the three-day weekend wary of any fallout from last week’s tariff announcements and several important economic releases coming this week. In the U.S., minutes from the recent FOMC meeting come out Wednesday, followed by the second estimate of Q1 GDP on Thursday. April’s core PCE price index arrives Friday, though little change is expected, as any inflationary impact from tariffs will take time to feed into the calculation. Technology bellwether Nvidia will report earnings Wednesday after the market closes. Other releases on the domestic economic calendar include durable goods orders, trade balance figures, pending home sales, and May’s revised consumer sentiment reading, along with inflation expectations. On the international side, inflation updates are on the agenda in Australia, Japan, and Germany. Last of all, China’s manufacturing and services PMIs will be released Friday evening.
CHART OF THE WEEK
Real Rates
Interest rates on longer-term government bonds are on the rise around the globe in reaction to the current climate of uncertainty. Last Wednesday’s auction of 20-year U.S. Treasury bonds, while far from a disaster, saw soft demand that sent yields higher and equity indices sharply lower. On Thursday, the U.S. House’s narrow passage of a sweeping tax- and spending-bill heightened concerns over the county’s fiscal trajectory. The events of last week, along with the recent Moody’s downgrade of the U.S. credit rating and worries over tariffs stoking inflation, have investors wondering if the appeal of U.S. assets is eroding. With the Federal Reserve holding short-term rates steady and the 10-year note yield pushing back above 4.5%, real rates—adjusted for inflation—are moving steadily higher. This week’s chart plots the difference between the 10- year yield and the annual CPI rate, which was 2.3% in April. Real rates have risen to 2.25%, the highest level since 2015. While that’s not high enough to raise alarm bells, it bears watching, as rising real rates can tighten financial conditions. Another indicator that investors and government officials will be keeping an eye on is the so-called “term premium” on U.S. debt—the premium demanded for holding longer-term bonds versus shorter-term bills and notes. It currently sits at about 75 basis points—low by historical standards and still well below the level in 2011 when the U.S. credit rating was first downgraded. Real rates often rise with strong economic growth expectations, which is tougher to achieve when a country has a high debt-to-GDP ratio. However, if real rates are climbing because investors demand more risk premium to hold U.S. assets, that can be a cause for concern. At this point, the trend’s explanation is far from clear.
Source: Charles Schwab Corporation
IMPORTANT LEGAL NOTICE AND DISCLOSURE INFORMATION
Investment advisory service is provided by SVL Holding Corporation dba SVL Investments Management (“SVL”), a California registered investment advisor. Advisory services are subject to advisory fees as disclosed on Form ADV.
Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risks unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets.
Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended or undertaken by SVL) or product made reference to directly or indirectly by SVL in its web site, or indirectly via a link to an unaffiliated third party web site, will be profitable or equal the corresponding indicated performance level(s). Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by SVL), or any non-investment related content, made reference to directly or indirectly on this site will either be suitable or profitable for a client or prospective client’s investment portfolio. Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, or the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results for investment indices.
Certain portions of SVL‘s web site (i.e. blog, Insights, newsletters, articles, commentaries, etc.) may contain a discussion of, and/or provide access to, SVL‘s (and those of other investment and non-investment professionals) positions and/or recommendations as of a specific prior date. Due to various factors, including changing market conditions, such discussion may no longer be reflective of current position(s) and/or recommendation(s). Moreover, no client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from SVL or from any other investment professional. SVL is neither an attorney nor accountant, and no portion of the web site content should be interpreted as legal, accounting or tax advice.
Rankings and/or recognition by unaffiliated rating services and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if SVL is engaged, or continues to be engaged, to provide investment advisory services, nor should it be construed as a current or past endorsement of SVL by any of its clients. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser.
To the extent that any client or prospective client utilizes any economic calculator or similar device contained within or linked to SVL‘s web site, the client and/or prospective client acknowledges and understands that the information resulting from the use of any such calculator/device, is not, and should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from SVL, or from any other investment professional.
Each client and prospective client agrees, as a condition precedent to his/her/its access to SVL‘s web site, to release and hold harmless SVL, its officers, directors, owners, employees and agents from any and all adverse consequences resulting from any of his/her/its actions and/or omissions which are independent of his/her/its receipt of personalized individual advice from SVL.