Following the strongest four-month start to the year since 1987, global equities pulled back in May on a breakdown in U.S.-China trade negotiations and recommencement of previously-postponed tariff hikes.  Financial markets were subsequently blindsided at the end of the month by President Trump’s declaration that he would also impose a 5 percent tariff on Mexican imports, potentially rising to 20 percent, if Mexico does not do more to stem the tide of refugees to the U.S. border. However, the blow to investor sentiment was somewhat softened by heightened expectations that the Federal Reserve will cut interest rates to mitigate any fallout on the U.S. economy. The impact of tariffs on global growth is expected to be partially offset by heightened policy responses, notably in China. However, when combined with rising geopolitical risks (i.e., Brexit, Iran, North Korea, etc.), the knock-on effects of a protracted trade conflict to confidence, investment, and consumer expenditures could definitely slow some vulnerable economies even into recession. The U.S. economy remains on relatively solid footing, trade policy uncertainty and the slowdown in global growth notwithstanding. However, we continue to project GDP growth will moderate to a trendline of roughly +2.2 percent exiting 2019 as the direct impacts of fiscal stimulus diminish. Fixed income yields decreased markedly in May. Specifically, U.S. Treasury yields decreased approximately 35 to 40 basis points, and high-grade municipals decreased approximately 15-25 basis points. Tax-exempt credit spreads tightened modestly. Tax-exempt market technicals remain favorable with record fund flows, modest supply, and projected net negative supply over the next few months. As a result, we have a favorable outlook for near-term price performance, although we think income will be the primary driver of performance over the remainder of the year.

For more details, including a longer discussion of the significance of an inverted yield curve, please see Sit Investment Associates’ April 2019 Global Investment Outlook and Strategy paper. Click here: Global Outlook and Strategy (Adobe Acrobat) or e-mail us at: siainfo@sitinvest.com.