Market Strategy Radar Screen Weekly June 25, 2018

We Gotta Live Together

Notwithstanding the impracticality of it—rhetoric appears to rule the day for now in issues of trade

As trade skirmish tension heightened over the course of last week, through the weekend, and ahead of market openings in Asia earlier today investors appeared to be bracing for things to get worse before they get better.

In conversations we had with investors last week it looked to us that while business people continued broadly to believe that a full scale trade war would not develop between the US and nations in Asia, Europe and North America, their expectations were fading that the US July 6th tariff deadline could be averted as rhetoric from all sides rose in considerable volume and rancor.

As we went to press Sunday evening, news crossed the tape that President Trump was considering further actions to limit China’s access to investment in US technology companies as well as access to US tech exports.

Projections of what the trade skirmish might cost the US and the world economy are crossing the transom with great regularity. In our view too often these estimates vary and are too dependent on their author’s viewpoint (business, political, and geographic) to be of much value considering the complexity of global trade.

That said, so far stateside equity and bond markets have shown a relatively sanguine stance amidst escalating trade tension. This has been reflected in a resilience of the US markets as trade issues garner increasing investor attention.

Stateside the economic expansion continues to appear sustainable and expectations for a good Q2 earnings season remain in place. These factors continue to provide positive offset to concerns about trade.

Investors Continue to Favor Small Cap Stocks

Last week major US equity benchmarks moved mostly lower with the S&P 500 stock index posting a weekly loss for the first time in four weeks. The Dow Jones Industrials, the S&P 500, the S&P 400 and the NASDAQ Composite respectively fell 2.03%, 0.89%, 0.14% and 0.69% in the week ended last Friday.

The Russell 2000 (small caps) managed to eke out a gain of 0.10% in the same period as that asset class category is considered less exposed to global trade risks than are stocks of larger market capitalization.

The yield on the 10-year US Treasury note eased further closing the week at 2.89% and off its high of 3.11% reached in the middle of May. Investors for now have turned to ponder away from inflation and monetary policy risk and moved toward consideration of what the cost of the current global trade skirmish—or even a further elevated fight—might have on the US economy, the dollar, US multinationals’ profits, and the world economy and markets.

Until cooler heads prevail at the geopolitical level or until somebody calls “uncle” or “enough is enough”, uncertainty and unease tied to economic and earnings vulnerability in such an environment will likely remain an unwelcome but inevitable overhang to market action on a day to day basis.

We continue to believe that movement toward resolution of what is currently an ongoing stand-off and shout out on international trade is more likely to come sooner than later.

Just how soon there will be a return to trade negotiations that have a chance to lead to compromise could depend on how long it takes world leaders involved in the skirmish to recognize the high cost to their respective national constituencies of a protracted trade war.

The complexities of trade and economies so intricately intertwined among nations across the globe all driven by secular trends in technology and globalization challenges ideologies and beliefs of diverse and opposing order to such extent that it may ultimately dictate the need for terms to reach a resolution to disagreements that threaten the considerable progress made by the global economy since the crisis of 2008.

Stay the Course

We believe portfolio diversification among asset classes on a global basis remains a prudent and practical approach in the current environment. We expect as we have previously said that investor patience will be rewarded; as will we believe, keeping an eye out for opportunities that are likely to develop along the way.

We expect that positive moves toward resolution to the current trade skirmish could result in rallies commensurate with the level of progress made in talks, negotiations or in actual compromise.

For the complete report, please contact your Oppenheimer Financial Advisor.

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