- We maintain 'underweight' allocation to stocks due to elevated geopolitical risks
- Reemergence of volatility resulting from increased U.S. China trade friction
- Trade deal with China unlikely until second half of 2019
- Tariffs anticipated to negatively impact both U.S. and China GDP with latest round of U.S. tariffs targeting consumer goods
- Accommodating Fed policy has benefited stock prices despite weaker corporate earnings
- Robust economic conditions can support continued expansion should trade dispute be resolved
- Volatility likely to continue through the summer
Trade Negotiations Breakdown
When trade negotiations with China hit a bump in the road a few weeks ago volatility was reintroduced into the financial markets, after being mostly nonexistent so far this year. As we stated in our last comment, we still believe a deal will be reached with China but, most likely, not until the second half of 2019. Meanwhile we continue watching the considerable amount of gamesmanship between Presidents Xi and Trump.
Most economists expect the current tariffs to reduce U. S. economic (GDP) growth by about .5%. China's growth would slow by approximately 1%. American consumers are likely to feel the current round of the tariff's impact a bit more than the earlier ones, as they are now primarily targeting consumer goods.
Fortunately, while growth is tepid, interest rates around the world have declined and financial conditions are "easier" today. The sharp rebound in stock prices this year are not due to increases in corporate profits and revenues, but rather an increase in "valuation multiples". Investors have been willing to pay higher prices for weaker earnings because bond yields are less attractive as a competitive alternative for the investment dollar. Financial markets are now navigating the negatives of "bumpy" trade negotiations and the positives of a more accommodative monetary policy. We expect our U. S. Federal Reserve Bank will leave interest rates alone through the remainder of the year, and neither raise nor cut rates in 2019.
Your investments have been participating in the stronger financial markets this year but remain conservatively invested. Our portfolios have 'underweight' allocations to stocks, due to the elevated geopolitical risks with Trade Negotiations and Brexit. Fundamentally, the overall economic picture looks reasonably constructive. American corporate earnings appear to be recovering, the credit markets remain healthy and labor markets are close to full employment while interest rates remain at lower levels. Although the economic and market cycle is certainly extended, we believe the expansion can continue further if the trade negotiations between the world's two largest economies are resolved and behind us. Until then, we expect the current volatility will likely continue throughout the upcoming summer.
We hope you are planning some fun rest and relaxation with your family in the months ahead. Please feel free to contact us if you have any questions or concerns. We are looking forward to speaking with you soon.
James C. Kuntz, CIMA®