Investment Insights: A two-horse race

Wade Balliet
Posted by Wade Balliet
Investment Strategy

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

After almost crossing the finish line, trade negotiations between the U.S. and China reached another hurdle over the weekend as President Trump tweeted that the U.S. would raise the current tariff on $200 billion worth of Chinese goods from 10% to 25% by the end of the week.

According to U.S. Trade Representative Robert Lighthizer, the president’s actions were in response to China backtracking on key agreements that would have altered the potential trade deal significantly.

Markets opened down on Monday, but pared losses before declining again on Tuesday. The S&P 500 has declined around 1.73% and global markets are in the red this week following the news. China’s Vice Premier Liu He and his delegation will visit the U.S. for trade talks on Thursday and Friday, so investors may be bracing for more tariffs, another extension of the truce, or even an official trade deal by the end of this week.

While increased tariffs may affect upcoming earnings, U.S. companies reporting first quarter results are handily exceeding all expectations. Despite the forecast for negative earnings growth, companies within the S&P 500 have had profits grow from the same time last year by 1.86%, according to Bloomberg, versus initial estimates of an almost 4% decline by Wall Street analysts. While that growth doesn’t hold a candle to the over 20% growth we saw in three quarters of last year, positive growth is positive growth. Much of the difference between those estimates and reality is likely due to a higher number of unexpected surprises, as well as the number of companies that beat their estimates. With 426 companies having reported, it is looking pretty clear that the S&P 500 will likely eke out positive earnings growth this quarter.

Some corporations seem to be taking advantage of this year’s run-up in the markets and their growing cash positions. Apple, one of the most cash-rich companies in the world with $225 billion on hand, has increased its already staggering rate of acquisitions. According to an interview with CEO Tim Cook, Apple quietly buys one company every two to three weeks on average, but has reportedly secured 20 to 25 businesses in just the last six months.

Meanwhile, Amazon seems to be reversing the retail trend that’s seen an exodus from brick-and-mortar stores by opening its twelfth cashier-less convenience store. According to Bloomberg, as many as 3,000 AmazonGo stores could open by 2021. Even oil companies are getting in on the action as Anadarko Petroleum continues to court buyers sparking a bidding war between Chevron and Occidental Petroleum, who most recently proposed a $38 billion buyout.

Our strategies continue to hold a slight overweight to equities, remain underweight to bonds, and are fairly neutral on alternatives. We have made adjustments in the past few months that reduced stock allocations and captured the notable gains from this year, while also becoming more defensive within our underlying stock and bond exposures. With a better than expected earnings season and the potential for a resolution to the U.S.-China trade dispute, there still seems to be some room left for stocks to edge higher. Our team will continue to seek additional opportunities to fine-tune our allocations as we look ahead.

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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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