Stocks started off the week plummeting further from increased trade threats, but later stabilized as the rhetoric toned down and the week unfolded. Additional exchanges of barbs on the trade front remain the major focus for investors at this time, with no clear picture where a potential deal is headed. In contrast, bond prices surged higher, dropping yields on longer term bonds, and inverting the yield curve for the second time this year. Underpinning trade fears, economic data remains mixed, with retail sales declining, weighed by auto sales and building materials, and US factory output also fell for the third time in the last four months. This data adds to signs of sluggishness, and could provide further impetus for a Fed rate cut this year. Meanwhile, homebuilder sentiment rose higher as demand for new homes continues to be strong on the back of resilient consumers.
Mixed signals from the White House continue to spur volatility, with every word parsed for direction on tariffs. With daily market swings based solely on announcements regarding trade deals, we should expect an ongoing bumpy ride through the rest of the year. The pattern does seem to be clear – initial salvos fired to spur action, followed be rapprochement and backing down. This week was no different, as once the threats to China abated, Trump further backed away from threats by hinting the US would delay imposing European auto tariffs, reversing stock declines. A close eye on the markets by the administration works in favor of equity investors, as the President appears to be keen on keeping the bull market running smoothly. Tariffs could also lead to dramatic increases in price pressures and inflation, harming corporate profits and consumers’ wallets, an outcome both the Fed and Trump seek to avoid.
As of this time, we think the recent pullback is overblown, as trade friction remains an old story, and ultimately the odds are overwhelmingly in favor of a trade deal down the road. The current storm looks more like an opportunity for long-term investors to find some select bargains as stocks had run up significantly this year. We will continue to operate under the assumption that both sides need a deal, and that the economic expansion is intact for now. If anything, trade struggles and disruptions in the markets provide further motivation for the Fed to extend their pause or even cut rates, which should extend the bull market. We have continued to add moderately to equities over the last week, as the short-term volatility looks like a time to buy, though we expect further price swings ahead. The risk-on rally for much of this year has seen large buyers on the sidelines, with corporations likely taking advantage of the recent plunge and buying back their own shares, and several large institutional buyers who had missed out on the rally deploying cash on hand.