Batten down the hatches! There be uncertainty ahead.

The old adage around Wall Street has long been “Sell in May, and go away” with the expectation that nothing much happens during the May to October period. This year, that would have proven to be great market-timing advice just about now! May was a no good month for many asset classes, with investors scrambling to buy up safe haven defensive sectors and assets (think Treasuries) and selling off the riskier ones (among which are equities). The S&P 500 itself fell 6.58% while the tech-heavy Nasdaq fell still further, down 7.93%. For trading, however, the month of May was another wonderful opportunity to take advantage of erratic short-term price movements in 2019.

What Happened in May
Just as a quick recap, we now find ourselves contending with some old fears that have risen up, once again, to face off against market optimism in 2019.

Trade War. Markets and asset classes have been thrown into a whirlpool of uncertainty following increasingly hardline posturing that eventually led to the breakdown in trade negotiations between the US and China. This cascaded with negative effect into economic forecasts (long-term effects on the US economy, worrying numbers indicating a potential slowdown for the Chinese economy), which resulted in inverted yield curves as investors fled into treasuries and other so-called low-risk safe havens. Beyond pundits discussing economic slowdowns, the scary R-word lifted its ugly head once again: could there be recession ahead? For reference, the 10-year treasury yield traded around the 2.13% level earlier today, down from 2.50% at the end of April. The plunge in yields closely tracking the rise in trade uncertainty as equities sold off.

Energy markets. Oil prices responded to the breakdown in trade with an equally spectacular decline as realized economic fears would have a very real impact on the demand side of the energy equation. US crude (WTI) fell 16.3% for the month, with the international benchmark (Brent) fell 10.5%. As the trade war seems to ever-expand (hello Mexico!), the fragile US oil demand-supply balance – already threatened by US energy producers hitting ever higher historic levels of output – may be upset as exports are affected to the detriment of upstream E&P companies.

What can be expected from trade negotiations?
Did the Chinese really backtrack on previous promises? Did President Trump’s team, headed by the trade hardliner Robert Lighthizer, negotiate in bad faith? To be honest, neither of these questions are relevant to the investor wondering how to position themselves around recent events. Should rationality win, then a pragmatic viewpoint is that these disturbances are merely positioning around the proverbial poker table; bluffs being called as other players (in this case, the other player) raise their bets yet higher. And the stakes continue to grow.

In this context, Trump’s Mexican tariff play may be a masterful move, meant to throw Chinese calculations off by inserting yet more uncertainty into the game. On the other hand, one scary thought is that President Trump may simply have realized that tariffs are a blunt but effective tool to quickly achieve some desired effect. In this case, the game is now dangerous and unpredictable- a situation that does NOT benefit the average long-term investor.

That is the US side of the equation. Across the pond, in a worst-case scenario, China may take a long stance – which they managed to do in the past quite effectively – and simply try to wait out Trump, while half-heartedly engaging in some level of negotiations so that the situation doesn't become too bleak for financial markets at home and abroad.

What should retail investors do?
A reasonable question! The Ignorant Investor sees current trade negotiations to be something of a coin flip, a gamble rather than an investment. A complex situation with unknowable outcomes since there are so many uncertain, unpredictable factors involved with these extended trade negotiations. In such circumstances, a cautious approach to the market is warranted and careful consultation with financial professionals a prerequisite before taking new, meaningful positions.

This doesn’t mean, however, that a passive approach to the market is best. Caution is advised, but when fear is moving the markets and when financial news programs are filled with angst over the future, that is when irrational moves are also being made in the equity markets. Irrational moves that can be adeptly exploited by attentive investors. Following the recent steep declines for equities, some “diamonds in the rough” may have already been unearthed and unceremoniously cast aside. Quality, as The Ignorant Investor seems to be saying month after month, is the name of the game for 2019. Quality in sectors that are relatively unaffected by trade tensions, trade wars, and tariffs - and sectors that will be least affected in the event of an economic slowdown - may be the safest place to be. Quality companies with compelling stories and pristine balance sheets.