Well, the first four months sure felt nice, didn’t they? We got through the end of 2018 by keeping our wits about us and not giving in to panic, and the New Year greeted us with a nice market rally that took us to new highs. The first few days of May seemed a continuation of this pleasing trend.

Then, on May 5th:

 

There goes our happy Sunday dinner. Markets had been pricing in a successful outcome of trade talks between the US and China, but it looked as though that was no longer the case.

Have trade talks completely derailed? Likely not, though throughout the month we witnessed a definite escalation in back-and-forth threats between the two nations.

Oh dear.

Maybe things look better elsewhere. What's happening overseas?

After failing to gain support on her Brexit deal, UK Prime Minister Theresa May announced her intention to resign as the leader of the Conservative Party in Britain. Leadership hopefuls have taken a decidedly more aggressive tone in their proposed dealing with the European Union; polls currently show Boris Johnson, the former Foreign Secretary, as leading the pack of declared hopefuls, and Boris has indicated his willingness to pursue a no-deal Brexit should negotiations with the EU fail to produce a satisfactory framework. The Bank of England has put any rate rises on hold until at least 2020, the pound has come under pressure, and a return to market volatility seems certain.

Oh dear.

Well, how about Canada? I think we might find some good news here:

Canada and the US reached a deal to eliminate tariffs! The deal applies to the tariffs the U.S. imposed last June by citing national security — 25 percent on imports of steel and 10 percent on aluminum — as well as Canada's retaliatory tariffs on steel, aluminum and on other consumer products. The economy seems to be holding in well, as Canadian headline retail sales were up 1.1% to CA$51.3B in March, representing another month of growth. According to RBC Capital Markets, there was sales growth in 7 of 11 subsectors and 9 of 10 provinces on a sequential basis. The Bank of Canada kept rates on hold as expected, though the future direction of rates seems to be a topic open for debate. The bond market is pricing in cuts, analysts see rates on hold, and the Bank of Canada says that if things turn out as it expects, rates will rise.

Who is correct? Stay tuned!

Speaking of the bond market, what do yields look like?

May has seen a rather steep decline on the 10-year US Treasury note yield. Recall of course that as yields fall, prices rise. Rising bond prices generally signal a “flight to safety” and reflect the view that troubled times could be ahead. At the time of writing, the current yield on the 10-year is around 2.16%, which is close to a 20-month low, and the 10y-3mo yield curve remains inverted (we’ve previously written on yield curves here, in case you somehow managed to miss it!)

Well, at least that Mueller report chaos is receding into memory and the US Attorney General said that there was no collusion or obstruction, right?

 

Oh dear.

Well, at least it looks like the USMCA trade deal will get ratified, and the G20 Summit comes up at the end of June, so a lot of these trade tensions might get resolved as leaders meet face-to-face, right?

Oh dear.

So, thanks for nothing, May. Not only does the weather stink, but markets stink too!

Hang on a second. Yes, it is difficult to deal with markets that can be sabotaged by a tweet while we’re eating dinner and preparing to cheer on the Raptors. And there are indications that global growth has slowed, and that a Hard Brexit, a Trade War, and a Possible Looming Recession are taking their collective toll on investor psyche. But, if you recall our article of earlier this year (“Stuck in Neutral”) a pullback is normal, especially after the strong markets we have seen over the previous four months. To quote Bob Dickey, RBC Wealth Management’s Technical Strategist, “It is normal for the markets to move in both directions over the shorter term, but the reasons for them doing so are different each time. An average pullback can be around 50% of the previous move to the upside, and often ends with the larger down days in the end. The sentiment measures of investors are already at levels we think indicate the anticipation of market weakness, which as a contrary indicator implies that the downside risk may not be as great as many would think. We believe the summer months promise to be more of the same volatility we anticipate will continue within the overall range of the past 18 months. We continue to believe this is an ongoing intermediate-term trading range that will see more volatility and some decent moves in both directions over the summer months.”

The long-term trend remains upward. And in the meantime, we can always hope that President Trump misplaces his phone.