The “candid and constructive” tweet rally from the previous Friday was short-lived as hopes of a trade deal evaporated by Monday morning after China said it would raise tariffs on U.S. goods and President Trump signed an executive order banning telecommunications equipment built by foreign adversaries (aimed at China’s Huawei Technologies). The market broke into a chorus of “I Don’t Like Mondays”, the 1979 classic from the Boomtown Rats, as the S&P 500 dropped 2.5%. Despite the bellicose rhetoric, a new narrative took hold that suggests that the Trump and Xi could strike a deal at the G20 Summit at the end of June. Outside of China some progress occurred last week with the auto tariff decision deferral and the lifting of Canadian/Mexican metals tariffs. Perhaps the biggest positive surprise came on Friday in the form of a surge in consumer sentiment to a 15-year high. The entire surge came from “future expectations” which had been significantly more downbeat than “present conditions” until this last reading. By the closing bell on Friday the S&P 500 had pared its weekly losses to 0.76% and the VIX (CBOE S&P 500 Volatility Index) was actually down 0.5% for the week.
The yield on the Ten-Year Treasury dropped 8 basis points to reach an 18-month low of 2.39%. Additionally, the Fed Funds futures market now suggest that there is better than a 50% chance that short-term rates will be cut later this year. Apparently, Walmart was an outlier retailer suggesting some signs of rising inflation. These Wal-Mart comments are fairly consistent with recent comments from Warren Buffett: Warren recently pointed out that stocks are ridiculously cheap if you believe that interest rates can remain at these low levels in conjunction with an economy at full employment and subdued inflation. On the other hand, he does caution that “the convergence of these factors would seem impossible to me. Generally, if I feel something is impossible, it’s going to change over time. I don’t know in what way, but I don’t think we can continue to have these variables in this relationship. At the risk of putting words in the Oracle of Omaha’s mouth, I believe that he is suggesting that interest rates are likely to rise and that stocks are more fairly valued.
Earnings season is basically over and the economic calendar is light. The FOMC meeting minutes which will be released on Wednesday will be closely scrutinized for any dovish or hawkish undertones. On Thursday May flash PMIs will give investors an early look at economic activity for the month of May.
Stocks on the Move:
Lee Enterprises, Inc. (LEE) +13.96%: Lee is a local news publication company in the United States. The Company reported second quarter results that demonstrated continued improvements in their operations. “The total revenue trend in the second quarter is the best quarterly trend in nearly four years,” said Kevin Mowbray, President and Chief Executive Officer. “This performance was driven by significant revenue growth at TownNews, incremental management agreement revenue and strong digital performance across our legacy businesses. LEE is a 1.03% holding in the North Star Opportunity Fund and LEE bonds are a 2.87% holding in the North Star Bond Fund..
Graham Corporation (GHM) +12.07%: Graham manufactures and sells critical equipment for the energy, defense and chemical/petrochemical industries based with emphasis on the United States. A research analyst from Maxim Group had positive comments about the Company ahead GHM’s upcoming earnings report based on the results of other industrial companies. GHM is a 2.57% holding in the North Star Micro Cap Fund.
Crown Crafts, Inc. (CRWS) -11.69%: Crown Crafts operates in the infant and toddler products segment of the consumer products industry through its wholly owned subsidiaries. Two of CRWS’ largest institutional shareholders sold their holdings recently, leading to a surge in trading volume and a multi-year low on the share price. The Company’s shares are now trading at less than 10x trailing earnings, with a 6.72% dividend yield. CRWS is a 2.44% holding in the North Star Micro Cap Fund and a 2.91% holding in the North Star Dividend Fund.