Fiery trade rhetoric reared its ugly head again this week, as Trump declared unilaterally that an increase in tariffs on Chinese goods would move forward, claiming the Chinese had backed away from earlier promises. Global markets plummeted, as investors feared once again that the specter of global trade wars would disrupt the fragile economic expansion that appeared to be stabilizing. Meanwhile, economic data continues to firm in the US, with job openings increasing steadily on robust hiring demand, mortgage applications stronger on robust new home sales, all while signs of inflation remain muted, with the producer price inflation read this week coming in below expectations.
Negotiations with China will be poured over this week to determine the direction of markets from here. As we have seen steadily over the last year, the political brinkmanship between the two nations has repeatedly ended with extreme bouts of volatility in markets, followed by an easing in discourse, and then markets steadily climbing back to all-time highs. There is not much reason to think this time will be any different, as both sides have too much to lose without a trade deal. Ultimately, the US and China must negotiate a trade deal or both sides risk severe damage to their own economies. As the two largest players in the world, global supply chains and commerce rely on cooperation, at least economically, between these powerhouses. Both sides acknowledge this simple truth, and will have to find common ground to avoid derailing the current expansion, not to mention risking both leader’s personal political ambitions.
As we feared, low volatility seemed unlikely to persist indefinitely. With the current political discord and an inability for consensus building, large market moves seem probable to erupt at a moment’s notice. The US-China trade deal will remain top of mind for investors until some form of settlement is reached. Until that time, we will remain more conservatively invested, with markets likely to reward those that can ride out the volatility. Having fixed income and alternatives to ballast equities and provide portfolio support continue to remain prudent. As for direction from here, it’s anyone’s guess how long the negotiations will take and how drastic markets will react to the current crisis. Some see signs that many of the “fast money” buyers, including hedge funds and institutional investors, who mostly have sat out this year’s rally thus far, are at the ready to step in and buy any further declines in equities. Further adding a potential floor, the corporate share buybacks that have already been announced for this year adds another source of buyers to market drops. Options, currency markets, and even Treasuries reflect the opinion that this will be short natured as well. We are choosing to be patient at this time, using available cash and short-term bonds to slowly allocate additional funds to stocks, as the present drop looks to be temporary in our opinion. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.