Financial Market Update
Welcome to the StrategicPoint Financial Market Update — a market and economic overview of what occurred last week and what’s up for this week. Please find our market commentary and most recent Blog posts in our StrategicPoint of View®.
Investors were heading for the hills early last week as stocks suffered their worst day on Monday following China’s announcement that it would impose an additional $60 billion in retaliatory tariffs on U.S. imports. Stocks for several companies with direct ties to China were hit particularly hard. The markets rebounded, but not enough to overcome the poor start early in the week. Helping to ease investors’ concerns over trade tensions, the Trump administration indicated that it would delay a decision on whether to impose tariffs on auto and parts imports. Then, last Friday afternoon, the administration announced that it had reached an agreement with Canada and Mexico that would end U.S. tariffs on steel and aluminum imports. Nevertheless, each of the benchmark indexes listed here lost value by last week’s end, led by the Russell 2000 and the Nasdaq. Year-to-date, the Nasdaq continues to lead the pack, ahead of its 2018 closing value by almost 18%.
Oil prices inched higher last week, closing at $62.71 per barrel by late Friday, up from the prior week’s closing price of $61.73 per barrel. The price of gold (COMEX) dropped again last week, closing at $1,277.40 by Friday evening, down from the prior week’s price of $1,286.50. The national average retail regular gasoline price was $2.866 per gallon on May 13, 2019, $0.031 lower than the prior week’s price and $0.007 less than a year ago.
S&P 500: 2859 (down 0.76% for the week and up 14.07% for the year)
NASDAQ: 7816 (down 1.27% for the week and up 17.80% for the year)
Dow: 25764 (down 0.69% for the week and up 10.44% for the year)
US Treasury 10yr: 2.39% (from 2.46% last week)
Crude Oil (June): $62.76 (from $61.94 last week)
Gold (June): $1,1275.70 (from $1,281.30 last week)
USD/Euro: $1.1161 (from $1.1202 last week)
StrategicPoint of View®: Trade War Worries
We have been sitting tight on our portfolio asset allocation since the beginning of the trade war escalation this month. Does this mean we aren’t worried? For now, the answer is, “Yes, unless.”
The outlook for US/China trade relations is unsettled. The US could be at the beginning of a long drawn out trade war, or we could see some form of agreement between the US and China emerge in the coming months. Every day seems to change the outlook.
The good news last week was that President Trump delayed auto tariffs on the European Union and removed steel and aluminum tariffs on Canada and Mexico, so the administration could focus on the US/China battlefront. At the same time, the outlook for a US/China trade agreement worsened as rhetoric escalated and the two sides dug in.
Both the US and China can weather a trade war for some time (the US has the Federal Reserve on pause keeping interest rates low, while China has the ability to stimulate its economy on a number of fronts.) Unfortunately, the public nature of the negotiations exposes the vulnerability of both President Trump and Secretary Xi Jinping to appearing ineffective. When it comes to negotiated settlements, a deal that leaves one side the clear winner and the other side the obvious loser is not viable. Each leader must walk away with sufficient terms in an agreement to meet with approval back home. And that may take time to mediate.
In the meantime, tariffs are having an increasing impact on the global economy. There is general agreement that tariffs can stifle global economic growth, increase prices and restrain consumer purchasing power. (See my colleague Derek Amey’s May 15,2019 blog Tariffs Explained.) Secondary negative effects can be felt from the potential of a rising dollar, higher inflation, slower capital investment and increasing uncertainty. The bet is that if major tariffs are used only as a short-term pressure tactic to force an improved trade agreement for the US and better protections for our technology, then the outcome is worth the temporary pain. The danger is that the short-term pain continues long enough to become a catalyst for a more severe economic downturn. We aren’t near that point yet, and there is much hope that such a negative impact can be avoided. Still, anxiety is rising.
Our Portfolio Management Committee spends a lot of time reading independent research scoring the odds of what happens next. Here are a few, selective quotes from some of our major research resources.
BCA Research: (5/20/19) “Temporary barriers to free trade, implemented as a negotiation tactic, are not a big deal for equities. A significant rollback to globalization, however, and a need to divert global supply chains away from China could stop the bull market in its tracks.”
Strategas (5/9/19): 25% chance for either a complete deal or agreement in principal reached in the near term with tariffs eliminated or substantially reduced; 15% chance that the talks totally collapse and tariffs escalate; and 60% chance of continued negotiations with possible improvement but some form of tariffs remaining in place.
Ned Davis Research: (5/14/19) “Recent estimates from the Tax Foundation suggest that all imposed and announced tariffs (most of which are on trade with China) will subtract 0.75% from long-run GDP, will reduce wages, and will cost more than a half million jobs.”
Barron’s: (5/19/19) “Both the US and China are in a better economic position to withstand the latest tariffs. And the Federal Reserve and other accommodative central banks offer markets a cushion. Changing trade patterns, meanwhile, could reduce the impact of the trade dispute on the global economy.”
For investors, the key is how long the stand-off lasts and what adjustments various countries and businesses make to the increasing costs of tariffs. Right now, markets are priced for a delay – not derailment – in a trade settlement. The temporary imposition of tariffs, while hard on certain segments of our society, will likely slow but not thwart economic growth. Still, in the near-term markets could remain volatile, impacting global risk assets. We wouldn’t even be surprised if the markets, through a significant slide, try to force the two sides to reach some interim acceptable interim arrangement.
That means that cautious investors should remain cautions while longer term investors should give the negotiations a chance to play themselves out. At the same time, we are mindful that the future may call for more active portfolio adjustments as geopolitical pressures define and redefine themselves over the coming months.
Betsey A. Purinton, CFP®
Chief Investment Officer
The housing sector is in the news this week with the April figures for sales of both new and existing homes on tap. New home sales have picked up the past few months, but sales of existing properties have dragged, primarily due to scant inventory and rising prices.
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Read our latest blog by Derek Amey where he explains some misconceptions about tariffs and how they can affect the American consumer.
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Parts of this report were prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019. Part of this content contributed by Forefield, Inc.