Risk assets have taken a fresh thumping in May. As of last night, the S&P 500 index was down 5.5% on the month, with energy (-9.2%), technology (-8%), materials (-7.4%), industrials (-7.1%) and financials (-5.6%) faring worst, and so-called ‘defensives’: real estate (-.05%), utilities (-1.6%),
health sick care (-2.3%) and consumer staples (-2.9%) faring less bad, as shown above from Yardeni Research.
Canada’s TSX stock index lost about half as much as the S&P 500 this month, but still -2.7%, again with economically sensitive energy stocks (-9.77%), materials (-7.66%) and financials (-3.43%) faring worst, real estate (1.5%) best; gold producers (-1.4%), and dividend-paying stocks (-2.33%) less bad, as shown above from my partner Cory Venable.
Copper (-8.6% on the month) has tumbled with global sentiment, along with oil (WTI -9.6%) while gold is just flat (.55%).
The most sketchy credits have followed equities lower (as they normally do) with US Junk bonds (-1.19%) and high yield (-1.13%). Investment grade corporate bonds are higher by a percent.
Traditional safe havens–government treasuries and the US dollar (vs. loonie)–have gained on bets that weakening demand and stock markets will prompt central bank rate cuts in 2019 (80% probability of US cuts now priced in). Yesterday, Bank of Canada head Stephen Poloz said the BOC remains on hold, but with a tiny 1.2% 2019 GDP growth forecast, rate cuts loom likely in the second half of the year.
Acknowledging that the BOC is probably done hiking this cycle, Canada’s 10-year treasury price rose this month, and its yield has fallen from 1.73% on April 30 to 1.56 today. This is back at the level it was just before the Trump election when tax cut promises drove dreams of inflation and a rising rate cycle that never came, (shown beside from Cory Venable).
Further warning of recession risk, some 40% of Canada’s treasury curve is already inverted (near-term rates above long), and the spread between 10 and 2 year yields has fallen to a cycle low of less than .049%; .156% in the US.
Many other countries already have negative spreads between their 30-year treasury and fed funds rate as shown below from Crescat Capital. Similar inversions preceded the 2001 and 2008 recessions and bear markets.
This cycle–starting from just 1.75 and 2.5%–North American policy rates will be back near zero in no time. The cavalry is running old playbooks but brings a fraction of its former force. This means the battle may well run longer with more casualties than the past two downturns. It’s wise for individuals to understand and take self-defensive measures accordingly.