Investment Commentary –May 29th, 2018

Year to Date Market Indices as of Market Close May 29th, 2018
Dow 24,361 (-1.45%)
S&P 2,689 (0.61%)
NASDAQ 7,396 (7.14%)
Gold $1,304 (-1.77%)
OIL $66.82 (20.63%)
US 10Y Treasury 2.78 (37.35%)
Barclay Bond Aggregate (-2.04%)
Fed Funds Rate 1.75 (last increase was 3/21/18)

Dow ends nearly 400 points lower as Italy’s political turmoil roils global markets

U.S. stocks ended sharply lower on Tuesday, with the Dow industrials down nearly 400 points as traders reacted to fresh political drama in Italy after a three-day weekend.
Another Italian election looks likely within a few months, and investors fear it could turn into a de facto referendum on the country’s membership in the euro.

The S&P 500 SPX, -1.16% fell 31.47 points, or 1.2%, to 2,689.86 with nine of the 11 main sectors finishing with losses. Financials led the declines, down 3.4%, tracking falling Treasury yields. Industrials and materials fell 1.6% and 1.8% respectively. Real estate and utilities shares were the only bright spot on Wall Street, suggesting a defensive posture.

Meanwhile, the Nasdaq Composite COMP, -0.50% fell 37.26 points, or 0.5%, to 7,396.59.

With two more sessions before the end of month, the three gauges are still on track for modest monthly gains in May.

Why Italy’s crisis could be a buying opportunity for stock investors

Italy’s latest political-economic-monetary crisis, which is rattling the financial markets, provides investors with yet another opportunity to learn how to react to the latest news headlines.

That’s because Italy’s troubles aren’t the first time in which countries, under the burden of too much debt and restrictive fiscal and monetary policies, threaten to break free of the currency regime — in this case the euro EURUSD, +0.7972% — in which they have been operating. Invariably following those prior crises, stock investors reacted with alarm, but more often than not the stock market quickly recovered and soon was trading for more than where it stood prior to the crisis erupting.

Perhaps the most spectacular recent illustration of this was the stock market’s reaction to the United Kingdom’s June 2016 referendum to exit the European Union (a.k.a “Brexit”). The Dow Jones Industrial Average DJIA, -1.58% dropped almost 1,000 points in the two trading days following the vote. But after just eight subsequent trading sessions, the Dow was higher than where it stood before the Brexit vote.

Around the Web:

Bond price rally: Prices of U.S. government bonds rose sharply, sending their yields lower, as investors focused on indicators of moderating economic growth. After reaching a seven-year high of 3.11% on May 17, the yield of the 10-year U.S. Treasury bond sank below the 3.00% threshold on Thursday and finished the week around 2.93%.

Fed minutes: The potential for an interest-rate hike in June grew after the U.S. Federal Reserve on Wednesday released the minutes from its latest meeting. The minutes said that Fed board members generally agreed that “it would likely soon be appropriate” to approve another rate hike if the economy continues to grow as expected. The Fed’s next meeting is June 12–13.

Trade tensions: The Dow climbed 298 points on Monday to its highest level in more than two months after U.S. Treasury Secretary Steven Mnuchin suspended efforts to impose tariffs on $150 billion in Chinese imported goods. However, tensions rose a couple days later as President Donald Trump raised the prospect of imposing new tariffs on imported automobiles.

Upcoming events:
Wednesday: First-quarter GDP, second estimate, U.S. Bureau of Economic Analysis
Friday: Monthly jobs and unemployment, U.S. Bureau of Labor Statistics

Other Notable Indices (YTD)
Russell 2000 (small caps) 6.43
EAFE International -0.62
EAFE Emerging Markets 0.15
Shiller Annuity Index 5.50

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.