Market Strategy Radar Screen Weekly June 18, 2018

Shouldn’t Have Took More Than You Gave

We quote Dave Mason as uncertainties over trade near term continue to weigh on global markets

Equity markets stateside traded mixed last week as the global trade skirmish picked up steam as the US expanded its tariff regime against trading partners in Asia, Europe and North America; US trade partners in the tariff-affected regions threatened, prepared and even initiated retaliatory moves; the Fed raised its benchmark higher (albeit at a measured and nuanced pace) and international markets priced in reflected concerns about a rising dollar, trade and slowing economic growth in Europe.

For the week ended last Friday, the S&P 500, the Russell 2000 (small-caps) and NASDAQ Composite respectively posted gains of 0.02%, 0.7% and 1.3% while the Dow Jones Industrials shed 0.9% and the S&P 400 (the mid-caps) slipped 0.4%

In the US investors showed favor to the cyclical and secular trends in technology and the greater exposure to the US economy within small cap stocks. The Fed’s rate hike last week appeared to be taken as part and parcel of the Fed’s commitment to rate normalization as well as evidence of the US economic expansion’s sustainability even with trade risk rising near term.

The international markets which broadly represent economies more dependent on exportation than the US took the developments in tariffs on trade somewhat harder in aggregate with MSCI EAFE (developed international markets), MSCI Emerging Markets and MSCI Frontier Markets respectively declining 0.5%, 1.9% and 3.2% on the week.

We’d note that MSCI EAFE’s (developed international markets ex-US and Canada) more modest declines for the week when compared with MSCI Emerging and MSCI Frontier Markets likely reflected investor relief that flowed through European markets after the ECB (European Central Bank) held interest rates steady last week and signaled that stimulus could last until the end of the year with rates to remain steady until at least the summer of 2019. The more dovish tone than investors had expected also helped push European sovereign debt prices higher.

Meanwhile the US dollar rises

It should be noted that the US dollar hit an 11-month high last week. This also likely contributed to losses posted by the major foreign indices on the week when translated (converted) into dollars. Dollar strength tends to reduce foreign gains and accentuates losses when translated into dollars. Dollar weakness inversely enhances gains and reduces loses when currency is taken into account.

The dollar’s gain of 3% year-to-date against the DXY index (a basket of key developed economy currencies) reflects in our view mostly the risk of a trade war with foreign export dependent economies. The dollar’s recent strength we think also reflects the comparative attractive yield on US Treasuries and prospects for US assets with the domestic economy currently showing sustainable growth with upside risk.

The 10-year Treasury’s yield ended the week lower last week falling from a near 3% level mid-week after the Federal Reserve Board raised its benchmark rate. The US bond market’s action last week reflected an economy that continues to improve, a degree of attractiveness in safe haven assets, and a good presence of foreign buyers in last week’s Treasury auctions.

We remain skeptical about prospects for the tariff skirmish currently under way to develop into a trade war. In a world where production and service platforms are complex and intertwined on international and inter-and intra regional bases a trade war is too impractical, wasteful and politically damaging for all parties involved to consider seriously.

During times when such impracticality (setting tariffs and mounting retaliations that would result in a trade war of considerable consequence) appears to be an option under consideration by multiple parties across the globe, it is important to remember that politicians, diplomats and business people too often opt to increase the volume of rhetoric before they bank on reasonable negotiation and adequate resolution.

We expect that most parties currently involved in hurling rhetorical barbs at one another recognize on some level that over the past six decades globalization and developments in technology have dramatically changed and leveled the global competitive landscape.

Such change we’d think inevitably calls for all parties involved to address the inequities within trade agreements that may have caused some parties to take more than they gave.

With prospects for the current market environment to remain near term a mixed bag of economic, political, geopolitical and market-related occurrences, markets will likely present investors with opportunities to weigh positive offsets against negatives in the weeks ahead. At such times we find patience is a virtue for investors.

We are keeping our expectations right-sized for now. “Know what you own, why you own it and have reasonable expectations as to how what you own is likely to perform in periods of transition such as these that markets are currently navigating” should remain a practical and useful mantra (if a lengthy one). In our experience wherever there is opportunity lies risk and similarly wherever there is risk lies opportunity.

Carpe Diem.

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