The escalation of the trade war between the U.S. and China is starting to bite as the S&P 500 index fell by 6.5 percent in the month of May. As a reminder, over a year ago, on March 2, 2018, President Trump wrote on Twitter “trade wars are fun, and easy to win.”

On April 29, 2019, The Wall Street Journal ran a headline “Mnuchin Suggests China Trade Talks Could Wrap Up by End of Next Week.” At the conclusion of the last public meeting between the U.S. and China on May 10, 2019, Treasury Secretary Steve Mnuchin said the talks were “constructive.” A few hours later President Trump threatened China with tariffs on an additional $325 billion worth of goods from China.

In late May President Trump announced plans to impose tariffs on goods coming into the U.S. from Mexico. The uncertainty around global trade is destabilizing at best. It is clear that the Treasury Secretary’s May 10th trade talks were anything but “constructive.” The fact of the matter is we live in a global economy with supply chains all over the world. The notion that trade policy can change with one tweet is unsettling to say the least.

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The yield curve is a subcomponent in the Interest Rate indicator in TJT Capital Group’s proprietary InVEST Risk Model®.

The yield curve inverted briefly in March (3/22 to 3/29) and inverted again yesterday (5/13).  An inverted yield curve is when short-term rates are higher than long-term rates.

The significance of an inverted yield curve is that it preceded the last three downturns as seen in the chart below, and has also preceded every recession over the past 50 years.

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The S&P 500 index rose to an all-time high of 2943.83 following a 3.9 percent gain in the month of April boosted by a stronger-than-expected Gross Domestic Product (GDP) report and generally solid corporate earnings. The rhetoric from the ongoing trade tensions with China has been toned down, however, a comprehensive deal remains elusive as issues of enforcement and the roll-back of tariffs remain unresolved.

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The S&P 500 gained 1.79 percent in March to close at 2834.40 as optimism over the trade negotiations between the U.S. and China and a 180 degree pivot by the Federal Reserve fueled the advance. The S&P gained 13 percent in the first quarter following the 13.9 percent decline in the fourth quarter of 2018. However, despite the impressive snapback, it is important to note that the S&P 500 traded at the 2834 level back in January 2018.

Of greater concern is that for the first time since 2007, the yield on the 10-year U.S. Treasury Note was lower than the yield on the 3-month U.S. Treasury Bill, which is known as an inverted yield curve. Specifically, on March 28, 2019, the yield on the 10- year Treasury was 2.39 percent while the yield on the 3-month Treasury Bill was 2.43 percent. The significance of an inverted yield curve is that it preceded the last three downturns as seen in the chart below, and has also preceded every recession over the past 50 years.

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The ISM Manufacturing and Non-Manufacturing Composite Indices are subcomponents in the Economic Cycle indicator in TJT’s proprietary InVEST Risk Model®.

The ISM Manufacturing Index declined to 54.2 in February from 56.6 and the ISM Non-Manufacturing Composite Index increased to 59.7 in February from 56.7.  A reading above 50 denotes expansion.

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The rally in financial assets continued in the month of February with the S&P 500 index gaining 2.97 percent as the Federal Reserve backed off from their quantitative tightening policy (reducing the size of their balance sheet). However, while the gains since late December are welcome, the reality is that from February 28, 2018 to February 28, 2019 the S&P 500 index is up 2.6 percent, not much more than the yield on the one-year Treasury Bill.

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The Conference Board’s Consumer Confidence Index is a subcomponent in the Sentiment indicator in TJT’s proprietary InVEST Risk Model®.

The Consumer Confidence Index fell to 120.2 in January from 126.6 in December and 136.4 in November.  Sentiment was undoubtedly impacted by the record 35 day government shutdown (12/22/18 – 1/25/19) but to what degree is unknown.   The next release is scheduled for Tuesday, February 26^th.

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The U.S. stock market rallied in January as the S&P 500 index gained 7.8 percent following the 9.1 percent drubbing that took place in December. Concerns about the government shutdown, ongoing trade war with China, and a major policy mistake by the Federal Reserve weighed heavily on the markets late last year. Those concerns receded in January as the government shutdown ended, trade talks with China continued, and the Federal Reserve made a 180 degree reversal in policy.

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The U.S. stock market came under intense selling pressure in December as fears of a major policy mistake by the Federal Reserve gripped markets. The U.S. stock market experienced one of the most volatile months in years as the S&P 500 index fell 9.1 percent in December as a slowing global economy, the effects of the ongoing trade war with China, and political uncertainty in the U.S. and Europe also weighed on markets. The decline occurred despite the S&P 500 having the largest single-day point gain in its history.

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