The stock market began 2019 with a boom. Reports came in that the economy grew faster than expected and the Federal Reserve abandoned its plan to continue raising interest rates.
Then threats of new tariffs fueled a widespread tumble in May. Investors worldwide seemed to be pricing in the growing cost of the escalating trade war with China, the new front with Mexico, and risk of tariffs on imports from Japan and Europe.
U.S. and foreign markets ended May with losses. The S&P 500 and the Dow Jones Industrial sank -6.4%, and the small-cap Russell 2000 lost -7.9%. The developed market EAFE index down -5.0% and emerging markets -7.3%.
Demand for risky stocks shrinks when investors think corporate profits are threatened, even if interest rates are coming down. If the Fed cuts interest rates, it would be doing so for a good reason: the risk of recession is real. In May, stock markets seemed to focus on that risk, and the drop in bond yields—the 10-year Treasury note yield tumbled to a 20-month low—seemed to spur the decline in the broad equity benchmarks.
However, while risks to global growth have grown, the U.S. continues to display sound fundamentals. In the first quarter earnings season, three out of four companies beat earnings estimates. Unemployment is near a 50-year low and wages are growing.
What to focus on now
We advise not letting uncertainty hold you back from your long-term plan. What matters isn’t what happens in the market, rather it’s how you respond. Focus on what you can control, like how you’re invested and how much risk you’re taking.
And remember that corrections are normal. In a given year, the S&P 500 averages a few pullbacks of at least 5% and typically one correction of at least 10%.