Market Briefing Friday 05-28 — China Tensions Weigh on the Market

Are we headed towards war with China?

Tensions between the U.S. and China are heating up following China’s decision to impose more restrictions on Hong Kong leading the U.S. to declare that Hong Kong is no longer autonomous from China.

President Trump is planning to hold a press conference today, detailing the situation and how the U.S. will respond. For now, it looks like the response will primarily be through political and economic lines. But as tensions and rhetoric continue to escalate, uncertainty is rising.

Relations with China will certainly be a key issue for investors even as we work through the process of reopening the economy following the coronavirus crisis.

Dow June Futures: Down 155 (0.61%)
S&P June Futures: Down 12 (0.39%)
Nasdaq June Futures: Up 5 (0.06%)

The U.S. stock market was relatively strong throughout most of the day yesterday. But towards the end of the day, shares pulled back following news of increasing tensions with China.

For now, it appears investors are in a “wait and see” period ahead of the Trump press conference.

The surge of cash sent to individuals and businesses continues to support stocks, and with trillions of cash still on the sidelines, it is unlikely we will see any kind of major pullback immediately.

Gold June Futures: Up 16.1 (0.93%)
Silver June Futures: Up 0.315 (1.73%)

Gold continues to trade in a relatively tight range after the March / April surge. The August futures contract is now the active contract. A break above $1,806 for this contract would represent a major breakout. The current price sits near $1,742.

Silver is also in a tight range and the September futures contract is now active. Silver is breaking out of a short-term consolidation period this morning. This looks like a good opportunity to start a position or add additional exposure if you’re already invested.

10-Year Yield: 0.664%  
2-Year Yield: 0.162%

Interest rates are pulling back a bit this morning. 10-year bonds have been trading in a very tight range for the last 6 weeks. This makes sense as the Fed attempts to hold yields exceptionally low.

This policy encourages investors to put their capital into more “productive” areas of the market, which in turn helps give businesses access to capital. Low yields are also intended to help keep borrowing costs low.

Breaking Morning News

The headline numbers tell us that inflation is dead. But as more stimulus cash flows into the market, many investors are betting that it will pick up. Gold is up 14% this year and I’ve told readers it could surge above $3,000 per ounce before the end of the year. As the U.S. prints money to hand out to citizens, the value of that cash could soon erode, driving the dollar price for precious metals higher.

Purchases dropped by the most since 1959. But with personal income boosted by government stimulus checks, consumers should be able to open up their wallets in months to come. This is a very important area of the economy. Historically, consumer spending has represented about 70% of the U.S. economy.

Chart of the Day

Continuing claims tell us how many people continue to be without work after being laid off. It is encouraging to see this number starting to drop as local economies begin to open back up and employees are able to get back to work.

There’s still a long way to go, but we’re starting to see our economy take some initial steps back toward a more normal environment.

Quote of the Day

After all is said and done, you have to minimize your losses and try to preserve capital for those few instances when you can make a lot in a very short period of time. ~Richard Dennis

Final Thoughts

Happy Friday! This is the last trading session in the month of May.

As we head into the summer, investors are facing a difficult balancing act. On one side, the economy has obviously been hurt by lockdowns to slow the coronavirus spread. Many companies will be permanently damaged and some will not survive.

Meanwhile, the Fed is keeping rates low, and government stimulus is pumping cash into the economy. That’s very bullish for the market.

For the time being, I think the bullish side of this argument will win over the economic damage. But it is important to look at your investments on a stock-by-stock basis to make sure you’re invested in the companies that can survive and thrive.

This is definitely a stock-picker’s market!

Enjoy the weekend!

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Zach Scheidt