Investment Insights: Fasten your seatbelts

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

Rollercoaster train, upside down in the middle of a loop, against a clear blue sky.Markets were negative at the open Wednesday morning after President Trump took to Twitter to warn Russia that the U.S. will be launching missile strikes against targets in Syria.

This statement was in direct response to the use of chemical weapons on opposition activists in the Eastern Ghouta region by Syrian President Bashar al-Assad. Major equity markets continued to trade down over the session vis-à-vis two additional factors: the continued specter of a potential trade war with China, and the ongoing investigation into the Trump administration’s connections with Russia during the presidential election.

Even without Wednesday’s market moves, equity markets have been a roller coaster over the last several weeks. The average magnitude – change up or down – of daily movements in the S&P 500 was 1.32% over the last 16 days, based on our team’s analysis of S&P data. To put that into perspective, the same analysis showed that in all of 2017 the market had only eight days where the S&P 500 moved 1% or more, while this year there have been 28 such moves so far.

The volatility comes amid an economic landscape that is still very advantageous for equity investors and risk assets alike, even as the business cycle matures. Earnings delivered growth of 14.18% for S&P 500 companies, while sales growth reached 7.76 %, according to Bloomberg, as the global economy continues its recovery phase eight years after the Great Recession. In all probability, investors were already pricing in this type of earnings result when comparing the current forward price-earnings valuations to that of that of historical averages. Without the delivery of double-digit growth in earnings per share, much more of a downturn may have been possible.

In our examination of the potential trade war, which has seemed less likely as of late, the trading relationship between China and the U.S. is quite symbiotic. China needs the U.S., and the U.S. needs China. The introduction of tariffs would only have a short-term benefit for domestic companies and a longer-term positive effect for governments through the collection of additional taxes. Ultimately, tariffs would negatively impact the consumer and each overall economy as the price competitiveness of goods would be eroded. Then, there is the worry that China, one of the largest purchasers of U.S. debt, would shift its purchases. This could ultimately increase interest rates faster than expected. China holds $1.7 trillion worth of Treasuries, and on top of this, the U.S. is set to issue approximately $1 trillion in debt this year, per Bloomberg.

This comes at a time when Chinese President Xi Jinping has achieved what some are calling the most successful consolidation in power within the People’s Republic of China since Mao himself – to include the recent removal of constitutional term limits that may allow Xi to retain his current level of control for the foreseeable future. This ultimately means that the discussions with China and President Xi will continue to define the relationship of the future, as we don’t see Xi stepping down anytime soon. The potential trade war, coupled with any prolonged military engagement, would be a ripe combination for further downdrafts in global equity markets. For now, we believe that the somewhat provocative statements by the U.S. are being used as a tactic to increase the country’s negotiating power.

As we have mentioned, the market isn’t waiting around for confirmation of this possibility and is instead trading on the uncertainty that these statements and some actions have evoked. We have grown worrisome, but not scared of the equity market and believe that earnings will eventually carry us higher. Until cracks start showing in company reports, we will continue to hold a moderate overweight to stocks within our strategies.

Chart showing various market returns as of 4/11/18

Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit, and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Diversification and asset allocation do not ensure a profit or guarantee against loss.


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