Major domestic indexes went down last week after all three gained more than 2% the previous week.[1] The S&P 500 dropped 0.54%; the Dow gave back 0.47%; and the NASDAQ lost 0.66%.[2] International stocks also stumbled; the MSCI EAFE decreased by 0.61%.[3] 

Two familiar topics were on many investors' minds last week: trade and treasuries. Here is a recap of the key details and their market impacts.  

1. U.S. and China Resumed Trade Talks

Background:

Tension between the world's two largest economies continued last week as the U.S. and China launched another round of trade discussions. Both countries have threatened billions of dollars of tariffs on the other's products, but, so far, neither has acted.[4] 

On Saturday, May 19th, the countries released a joint statement saying they would take measures to "substantially reduce the United States' trade deficit in goods with China." The Chinese state media called the agreement a "win-win."[5] Then on Sunday, May 20th, U.S. Treasury Secretary Steven Mnuchin announced that they had "put the tariffs on hold."[6] The weekend's developments imply both countries will continue working to close the trade deficit by increasing China's imports of U.S. agricultural commodities and energy.[7]

Market Impact:

As the trade talks unfolded on Thursday and Friday, investors received very little information. This uncertainty affected investor sentiment and contributed to stocks ending lower on Friday.[8] Now that the countries have shared some details about the negotiations, we will focus on how investors digest the news in next week's trading. Mnuchin's assertion that the trade war is on hold for now should be welcome news for investors.[9]

2. U.S. Treasury Yields Spiked

Background:

The 10-year Treasury yield closed at 3% or higher every day last week.[10] Early Friday, it reached its highest point in almost seven years as data continued to demonstrate the labor market's strength. We learned last week that the number of people receiving jobless benefits is at its lowest since 1973. Unemployment is also currently at an almost 17-year low. The numbers suggest the economy is likely reaching full employment. 

So, how does labor data affect Treasuries? Typically, employers have to pay higher wages when unemployment is low. As wages increase, other prices in the economy often rise, which can trigger inflation. This can cause Treasury prices to suffer as their fixed payments become less valuable, causing yields to rise.[11] 

Market Impact:

Treasury yields affect markets in a variety of ways. When they increase quickly, concerns can arise that the economy is accelerating too fast, which can cause the Federal Reserve to raise interest rates. In addition, for 10-year Treasuries, yields above 3% are a psychological benchmark. Some people believe stocks become less appealing when Treasuries can provide this level of income.[12] 

What's Ahead

For now, we will continue to analyze whether yield increases are a sign of a strengthening economy or rising inflation rates. 

We know that trade disputes and Treasury yields are complex, constantly changing topics. So, if you have questions about how these details affect your financial life, we are here to talk. 

ECONOMIC CALENDAR

  • Wednesday: New Home Sales, FOMC Minutes
  • Thursday: Existing Home Sales, Jobless Claims
  • Friday: Durable Goods Orders, Consumer Sentiment

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Diversification does not guarantee profit nor is it guaranteed to protect assets.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies. 

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indices from Europe, Australia, and Southeast Asia.

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

The Federal Reserve System (also known as the Federal Reserve and, informally, as the Fed) is the central banking system of the United States. The Federal Reserve System is composed of 12 regional Reserve banks which supervise state member banks. The Federal Reserve System controls the Federal Funds Rate (aka Fed Funds Rate), an important benchmark in financial markets used to influence the supply of money in the U.S. economy.

Inflation is the rise in the prices of goods and services, as happens when spending increases relative to the supply of goods on the market. 

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Past performance does not guarantee future results.

You cannot invest directly in an index.

Consult your financial professional before making any investment decision.

Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

These are the views of Platinum Advisor Strategies, LLC, and not necessarily those of the named Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

[1] www.cnbc.com/2018/05/18/futures-point-to-higher-open-amid-us-china-trade-talks.html
[2] http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX®ion=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI®ion=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO
[3] www.msci.com/end-of-day-data-search
[4] www.nytimes.com/aponline/2018/05/18/world/asia/ap-financial-markets-.html
[5] www.reuters.com/article/us-usa-trade-china/china-agrees-to-import-more-from-u-s-no-sign-of-200-billion-figure-idUSKCN1IK0PM
[6] www.latimes.com/business/la-fi-china-us-trade-war-on-hold-20180520-story.html
[7] www.reuters.com/article/us-usa-trade-china/china-agrees-to-import-more-from-u-s-no-sign-of-200-billion-figure-idUSKCN1IK0PM
[8] www.cnbc.com/2018/05/18/futures-point-to-higher-open-amid-us-china-trade-talks.html
[9] www.latimes.com/business/la-fi-china-us-trade-war-on-hold-20180520-story.html
[10] www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2018
[11] www.cnbc.com/2018/05/18/us-yields-fall-back-after-climbing-to-fresh-seven-year-peak.html
[12] www.marketwatch.com/story/us-stocks-set-to-end-the-week-on-a-higher-note-with-trade-talks-yields-in-the-spotlight-2018-05-18