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Investment Insights: Tipping the scales

Wade Balliet
Posted by Wade Balliet
Investment Strategy

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

Investors wait with baited breath for a U.S.-China trade deal that has been publically touted repeatedly by both President Trump and Chinese President Xi Jinping.

After a strong start to the year, stock markets have been trading in a fairly flat range in anticipation of some driver that will push prices in either direction. The S&P 500 slid 0.10% in the past week, while global stocks – measured by the MSCI ACWI – have declined about 0.22% after both gauges achieved double-digit gains in the first month and a half of 2019.

Misses in personal spending and personal income, and a recent lower-than-expected result in construction spending have added to pessimism surrounding the U.S. economy despite a positive surprise in fourth quarter GDP that brought 2018 economic growth to 2.9%. Domestically, mixed economic data has puzzled investors as they attempt to weigh and balance economic, financial, and geopolitical news.

Most recently, White House economic advisor Larry Kudlow commented that U.S. and Chinese officials were on track to accomplish a “remarkable, historic deal,” which echoes statements from both heads of state. The potential deal could include lower tariffs and increased purchases of American products by China, while the U.S. may remove sanctions placed on Chinese goods since the trade escalation, according to the Wall Street Journal. President Trump wrote on Twitter that substantial progress had been made and both leaders may meet at his Mar-a-Lago resort at the end of March to finalize the agreement.

However, the president is still on the hunt for trade relationships that may be deemed unfair. In a new decision by the White House, tariff-free access to the U.S. for goods from India and Turkey via the Generalized System of Preferences will no longer be allowed. This U.S. trade program from the 70s was originally deployed to help boost economic growth in developing countries.

A formalized trade deal with the U.S. could be the boost China’s economy needs as recent data has reflected struggling growth. At the opening of the National People’s Congress, Chinese Premier Li Keqiang cut the country’s growth target to between 6% and 6.5% for 2019. While this is a remarkably strong growth pace for any country, the cut underscores Li’s own comments that the economy will face a “tough struggle” in this more complicated environment.

According to the National Bureau of Statistics of China, the Chinese economy expanded by 6.6% in 2018 – its slowest rate in 28 years. Officials have already attempted to stimulate the economy and, most recently, plan to make a 3% cut to its value-added tax affecting businesses, which could add an estimated $90 billion to the economy and improve corporate profits, according to Bloomberg.

Our Global Investment Management team remains concerned about a slowing – or normalizing – earnings growth environment as well as mixed economic data domestically. While an official trade deal between the U.S. and China would likely provide a boost to financial markets, it may not outweigh negative factors being digested by investors. We are reviewing a reduction in exposure to more volatile stock sectors with safe haven bonds being the most likely reinvestment.

For direct access to investment insights, market updates, and perspectives on financial topics from Bank of the West and BNP Paribas leaders, download the Voice of Wealth app, available at the Apple iTunes and Google Play stores.

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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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