The week we just had will wear out a person, especially a market analyst like your author who is tasked with analyzing and explaining the daily twists and turns of the stock market. To be sure, there were a lot of twists and turns this week on the same road to nowhere.
We learned that China is going to raise the existing $60 billion tariff tranche rate to a floating range of 5-25% from 5-10%, effective June 1, in retaliation for the U.S. raising its tariff rate on $200 billion of imported Chinese goods to 25% from 10%.
The bigger learning point is that there were no deals made, no meetings officially scheduled, and no sense that either side is willing to back down from entrenched positions in this "little squabble," as President Trump deems it.
We didn't learn anything new on Brexit, unless you count the news that the talks between the Conservative Party and the Labour Party broke down without a deal, which means the UK is still on course for a no-deal Brexit.
We learned a little something new about the state of the global economy, as China and the U.S. both reported weaker-than-expected retail sales and industrial production data for April. The takeaway, though, was largely the same, which is that the disappointing reports signaled the global economy is operating on a low glide path.
We learned Fed officials are not yet ready to cut rates and still prefer a wait-and-see approach. In other words, we learned nothing new about the Fed's next move.
We didn't see anything new in the Treasury market. Yields continued to come down on fund flows driven by the gyrations of the stock market, the negative yields in foreign bond markets, low inflation prints, and expectations that the Federal Reserve is ultimately going to cut its policy rate before the end of the year.
There was nothing new in the dollar's relative strength position. The greenback remained in favor as the euro and the British pound remained largely out of favor.
From Here to There
The trading week in the stock market was a microcosm of how it has traded for the better part of the past 16 months. It has been all over the place, but hasn't really gotten anywhere.
The S&P 500 closed at 2872.87 on January 26, 2018. As of this writing, it was trading at 2873.80. Granted it has the distinction of having set a new all-time high of 2954.13 on May 1, 2019, but the air up there was thin and here we are.
The trading action since January 26, 2018, has been a roller-coaster ride. It has been filled with steep climbs, steeper drops, and many turns. It has been a thrill ride alright, yet the return, excluding dividends, hasn't been all that thrilling for buy-and-hold investors.
There are sub-optimal return periods like this, particularly after an extended period of optimal returns like the one buy-and-hold investors enjoyed from the low of 2009 to that peak in January 2018, which erased the losses, and then some, from the plunge during the financial crisis.
Runs like that don't happen often and they are hard to predict, which is why there is always a latent benefit to being a buy-and-hold investor.
The latter point notwithstanding, the past 16 months might feel frustrating because there has been a negligible return. Conversely, they might feel great for anyone who bought on the dips during the past 16 months, assuming they bought at the right time and got out at the right time, which is not an easy feat for most people.
It goes to show, however, that the benefit of time accrues to the investor, whereas, the trader is greatly dependent on having good timing, not to mention good discipline to get out of a trade at the right time if he/she is to benefit.
The roller-coaster action of the past week was driven mainly by the uncertainty surrounding trade negotiations between the U.S. and China and what impact there might be on the global economy and earnings prospects.
It wasn't entirely dissimilar to the past 16 months, which have also been imbued with a heightened sense of uncertainty about "the outlook," as worries about earnings prospects have slowed the momentum of the bull market.
That uncertainty has been wrapped up in matters pertaining to trade, monetary policy, and economic growth. While trade headlines dominated the past week, those same areas of uncertainty permeated the trading action.
Not surprisingly, there was a more defensive-oriented mindset that manifested itself in the outperformance of the utilities, real estate, and consumer staples sectors, gains in the Treasury market, and rising bets in the fed funds futures market that the Fed will cut interest rates as early as the September FOMC meeting.
What It All Means
What has been learned this week? The more things have changed, the more they have stayed the same, starting with the S&P 500.
Other lessons learned by investors in the microcosm of this week's roller-coaster trading action include the following:
- Dividends provide a return premium.
- Portfolio diversification is important, as it allows you to participate in upside action and cushions the blow of downside moves.
- There are times in the stock market that are less prosperous than others, yet value will inevitably accrue with the benefit of time.
[Editor's Note: The next installment of The Big Picture will be posted the week of May 27.]