Trade Tensions Knock Stocks.

What happened.

After a good April, May saw a decline in stocks across all major categories. Domestically, small-cap stocks (S&P 600) saw the biggest declines, down 8.73 percent for the month. Large-cap stocks (S&P 500) were not far behind losing 6.35 percent. International markets struggled as well with developed stocks falling 4.8 percent and emerging market stocks tumbling 7.26 percent (MSCI EAFE and Emerging Markets indices). It was also a more volatile month. The S&P 500 was down by more than 1 percent on four days. Bonds were a bright spot. As interest rates fell, bond prices rose, with the Bloomberg Barclays Aggregate Bond Index up 1.78 percent.

Why it happened.

A new escalation of trade tensions was the main driver of stock markets in May. In the first half of the month, the U.S. threatened to increase tariffs on Chinese goods, and followed through on the threats a few days later. U.S.-China talks then reached a stalemate, and China announced plans to impose tariffs in retaliation. At the end of the month, the U.S. made a surprise announcement that it would impose tariffs on Mexican imports starting in June, and that these tariffs would increase over time if Mexico did not reduce the number of undocumented immigrants traveling from Mexico to the U.S. In each case, the markets fell on the news. Market participants were concerned about the possible impact on the economy and companies’ earnings.
Meanwhile, the economic news was mixed. Growth in U.S. manufacturing activity slowed to its weakest pace in more than two years, and declines were reported in home purchases and orders of business equipment. But on the positive side, the job market continues to be healthy and consumer sentiment positive. There was also news from overseas. The British prime minister announced her long-anticipated resignation, leaving the long-running Brexit saga to continue under new management. News on the Chinese economy was somewhat weak.
What should you do in the face of this uncertainty? In this month’s sidebar, we examine this. The main thing you should be thinking about — whatever the news — is whether you’re comfortable with the risk you’re taking. You can’t control events, but you can make sure you’re ready when they happen.

What this means for you.

At Financial Engines, we build a portfolio that is tailored to your situation and preferences. In May, your account would probably have declined. The more risk you’re taking, the greater the decline would have been. Our program offers different levels of risk. It’s a good time to make sure the amount of risk you’re taking is right for you. Please let us know of any changes by logging into your Financial Engines account or calling one of our advisors.

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