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Trade Hopes at the G20

| July 02, 2019
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Global market participants pushed equity prices higher during the week as sentiment appeared to favor a hopeful and positive outcome tied to trade tensions between the U.S. and China.  The catalyst for the upbeat sentiment can be attributed to the G20 meeting in Osaka, Japan, where President Trump and China’s President, Xi Jinping, were set to meet.  The G20 is a meeting of the world’s 20 largest economies, comprising nearly 85% of the world’s gross domestic product (GDP), according to Bloomberg.  Following the brief meeting between the two leaders, it appears that an agreement has been reached for the two countries to restart trade talks and attempt to avoid a tariff war.  Nothing definitive was reached in such a short time frame, of course, yet the hope remains that a solution can be announced over the coming weeks.  We have stated numerous times in the past that the best solution to global trade in today’s world is likely one that cannot favor one country over the next, despite the promises made from politicians, both domestically and abroad.  That simply does not work mathematically.  The Standard & Poor’s (S&P) 500, which comprises the largest 500 companies domiciled in the United States, derives nearly 50% of its revenue from foreign sources.  With such a tremendous revenue attribution from non-U.S. based consumers, and non-U.S. based suppliers, the argument to reach a trade solution that mutually benefits all countries involved remains the best objectively derived answer.  It’s also important to note that those same 500 companies are responsible for employing 25 million people worldwide, a vast majority of which reside in the United States (Bloomberg).  We’re eagerly waiting for upcoming announcements tied to potential trade solutions with China, Mexico, and all other trading partners. 

Although global equities gained ground during the week, U.S. based large capitalization equities, as depicted by the S&P 500, managed to close lower by nearly -0.30%.  The MSCI EAFE index, which tracks equities within developed international countries, gained 0.67%.  The most interesting performance figures during the week stemmed from U.S. based small caps companies, which gained 1.80% (S&P 600).  In an environment where the domestic hope would be for revived trade talks, ergo helping larger companies, we witnessed the complete opposite.  If we see such a trend continue amidst global sentiment that attempts to solve trade issues, it may be possible that domestic market participants have priced-in a weak trade solution with China.  One such market where weakness is potentially being signaled for global sentiment is the fixed income market.  The continuous downward slide in global yields, as well as the debt burden that is currently residing in negative yielding territory, can certainly be deciphered as weak with a negative potential outlook.  We fundamentally believe that an objective approach to accepting risk across the fixed income market will be the deciding factor as to how performance may affect overall portfolios. 

In other important announcements during the week, we learned that the third revision of U.S. first quarter GDP was announced at an annualized pace of 3.1%, which was below the 3.2% economists’ expectation.  Although below estimates, a pace of 3.1% may sustain the current expansion well into year-end.  Housing data was also announced during the week and we learned new home sales dropped notably more than expected in May.  We anticipate a mild and positive reversal in the housing market over the next 12 months given that earnings guidance from homebuilders appear to be in healthy territory. 

Investment Policy Committee:

 

Investment advice offered through CX Institutional, a registered investment advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.

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