The ongoing trade disputes between the U.S. and China resumed violently during the week as the President tweeted on Sunday, May 5th, on the intentions of increasing Chinese tariffs to as high as 25% from the current 10% tariff. The net increase is not intended to affect all products from China, but it will certainly impact a slew of consumer goods from technology related products all the way to produce. The highly unanticipated tweet sent global equity markets in a frenzy on Monday, as well as for the entire week, given that the uncertainty of a trade war, or restrictive global trade in general, is not entirely conducive to what market participants view as optimistic. Considering the notion that nearly 50% of all revenue from the 500 largest companies in the U.S. stems from outside U.S. borders, the fear of restricted trade may bleed to earnings expectations and overall corporate guidance. It may be too soon to accurately gauge what the impact of the latest trade spat will yield, but the uncertainty caused will have the potential for further downside across risk assets. Unlike the notion of risk, which is plannable, it’s important to keep in mind that uncertainty is not plannable. Tariff tensions will continue to weigh on global equity markets until the threats (from both sides) subside and a deal is reached. From a purely objective standpoint, and not focusing on the political administration in power, global equity markets behave best when intentions are derived to improve global trade, not restrict it. There are certainly various avenues to take in the improvement phase and we believe that excessive tariffs should not be part of that discussion. China’s retaliation, which is inevitable, may hurt U.S. farmers the most as well as small manufacturing companies. Equity markets responded negatively to the tariff news as the domestic Standard & Poor’s (S&P) 500 lost -2.10% for the week while emerging market equities (MSCI EM) closed lower by -4.52%.
From an objective assessment, it’s important for us to reiterate that the overall risk metrics of the domestic market, as judged by valuations, earnings trends, debt levels, and overall sentiment, appear well intact. Moreover, we see no evidence of a bubble-like scenario across sectors. Although certain equities within the technology sector may be construed as overvalued and risker (relative to the market), the large capitalization equity market remains favorable for long-term investors. It is only natural that volatility may cause concern during such stressful times and the desire to exit equity market exposure may reign supreme. We urge caution in such an environment because the tide can change very quickly. Historically, when broad equity market health has remained positive and overall political, and geopolitical, factors have caused concerns (i.e. trade war and/or oil dispute with Iran), any positive changes to the rhetoric from either side have resulted in quick equity market upside. This is exactly what happened in late 2018 when global equities erased nearly -15% of value in 4 months before quickly recouping and surpassing the previous highs. The embedded FLEX options within our multiple strategy platform, coupled with our ability to quickly change the underlying equity level risk line-up of our strategies, may allow for a better ride through the storm. Taking advantage of opportunities amidst the volatility is the bright spot in the current equity market environment and it’s one we’re excited for.
On the economic data front, the release of the latest inflation figure, as dictated by the Consumer Price Index (CPI), failed to materialize in the manner that the Fed alluded to in its latest press conference. We’ll be paying close attention to upcoming Fed comments on their ‘transitory’ issues for the lack of inflationary pressures. The Fed’s transitory items are airfare prices, financial services, and apparel.
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.