A controversial topic currently exciting economists goes by the name of Modern Monetary Theory (MMT). While there are many ways to interpret it (as you can see from its name, it doesn’t actually describe anything), the key tenet is that deficits don’t matter. Governments that control their own currencies, like the U.S., can spend whatever they want simply by printing more money. The controversy doesn’t come from this assertion—it’s a simple fact—but from the different interpretations of what, exactly, this means.

One of the most reliable signals of a pending recession is when, in the jargon, the yield curve inverts. This sounds like a fancy phrase, but it simply means that investors demand to be paid more for a short-term loan than for a long-term one.

This has been a busy week of catching up after attending another round of excellent Commonwealth conferences. So, today I have just a few quick takes on some wide-ranging topics.

It’s time for our monthly look at market risk factors. Just as with the economy, there are several key factors that matter for the market in determining both the risk level and the immediacy of the risk. Although stocks remain close to all-time highs, the recent volatility is a reminder that, given valuations and recent market behavior, it is useful to keep an eye on these factors.

After a difficult first quarter, April’s data was better. But, in aggregate, May has not continued that improvement. Job growth has slowed further, taking it closer to a risk level. Plus, the interest rate outlook continues to deteriorate, with the yield curve now inverted for a period of weeks. Not all the news was bad: both consumer and business confidence improved, which should help growth going forward. Overall, though, risk levels have increased somewhat.

I do a semiannual update of my economic and market outlook every year, usually in several versions over a one- to two-month period. In the past couple of years, that strategy has worked. Fundamental conditions didn't change much over that period, even though headlines often did.

“Sell in May and go away” was certainly on point last month. With U.S. and global markets down significantly, investors closed out the month with a level of worry we have not seen since the end of 2018. Let’s take a look back at this volatile month, as well as what we might expect going forward.

Yesterday, the tech stocks got hit hard on news that Washington will be taking a much harder look at regulating them. Trade worries continue to reverberate throughout the market. And fears of a more severe slowdown—or even a recession—are building as the yield curve remains inverted. Further, the Nasdaq moved into correction territory yesterday (defined as a decline of more than 10 percent from the peak), although as of this writing, it was showing signs of a strong bounce today. 

May was a tough month, with U.S. and international markets down. At the same time, last month’s decline could be considered modest, and it was not based on fundamentals. Instead, it was all about confidence, which was rattled by a reignited trade war with China and proposed tariffs on Mexico. Still, there was some good news. Consumer spending picked back up, and job growth remained strong.

Much of the recent market decline has been due to worries that the U.S. and China have been intensifying the trade confrontation, rather than trying to come to a deal. With the recent announcement by President Trump that he intends to impose tariffs on all imports from Mexico, trade risks have risen even further and markets have continued to drop. So, what could this latest round of tariffs mean for investors and for the markets?