Investment Insights: tech, tariffs, and Trump
This weekly report presents insights from our Global Investment Management team.
Amid the market’s swing downward on Monday and its Tuesday rebound, there have been three themes dominating headlines and moving markets across the globe.
First, markets continued to focus on U.S. tariffs on Chinese-made products such as batteries and semiconductors. In addition, President Trump’s attacks on Amazon and the data scandal between Cambridge Analytica and Facebook have put technology – the largest sector of the S&P 500 – directly in the limelight. The FANG stocks (Facebook, Amazon, Netflix, and Google) saw negative returns ranging from almost 11% to more than 15% over the last two and a half weeks before finally finding some footing yesterday, according to Bloomberg.
The big concern for profits varies among these companies and depends on which factors one wants to consider. Amazon’s business model is being called into question regarding its ability to charge appropriate sales tax on third-party goods and its use of the United States Postal Service’s delivery for “the last mile.” Essentially, the president has called into question the price that’s paid to the USPS and whether it’s congruent with pricing from FedEx and UPS. Trump has also raised questions as to whether the company is avoiding taxes on sellers’ products.
However, the administration could do a number of things besides tweet about Amazon. These include opening anti-trust or consumer protection investigations and potentially impacting the Pentagon’s review of the company’s contract for cloud services. This is a multi-billion-dollar contract that could impact future profits for Amazon, as well as damaging its reputation with consumers.
Meanwhile, Facebook and Twitter are facing a different type of pressure: privacy.
It has become widely known that Facebook has allegedly abused user data after confirming that Cambridge Analytica secured the data of almost 90 million Facebook users. This has broad implications for privacy laws throughout the United States, Europe, and China. And again, it could impact future profits and company reputations. Twitter would also be affected, from its wide-reaching user base and its privacy protections. All in all, it has not been a great couple of weeks for the tech sector. Still, Bloomberg data show the sector is actually positive for the year, and especially relative to the overall market, beating the S&P 500 by 3.72% for year through yesterday.
This other shoe that has dropped has continued to increase volatility and uncertainty and made the screams for the “fundamentals are still good” a hoarse whisper. But truly, what the tweets, the privacy issues, and to some degree the tariff discussion have masked is a global sync of mostly positive economic data. We expect some of this noise to quiet down in the near future, but the threats of a potential trade war and additional tariffs are indeed long-term threats to companies and the financial markets. The supply chain impacts of these tariffs will take quite a while to process, but this is not a headline risk; this is a credible detractor to stocks across the globe.
We believe volatility will break out of its lower trading ranges and remain elevated for the foreseeable future. We advise investors to stay strong, carry on, and remain disciplined. Our team believes the risk of recession is minimal in the next nine months and we retain our outlook for modestly increased equity prices for 2018.
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