Linda S. Parenti, CFA
Chief Investment Strategist
The equity markets had a strong start to the first four months of the year. Sentiment among market participants had grown confident and valuations richer as the S&P 500 reached a new closing high of 2946 on April 30. A pause in the market’s upward trajectory was certainly due, but the timing of one is always unknown. The recent deterioration in trade negotiations with China was the needed trigger and has put downward pressure on stocks month-to-date.
Both sides stand to lose without progress on trade, so it would be reasonable to remain hopeful that a deal will eventually be reached. Since we import more from China than they buy from us, we can raise tariffs on more goods. However, there are other ways China can fight back. Increased regulatory pressure and additional restrictions on US companies who operate in China is one possibility. Another commonly discussed concern is the fear they will sell their $1.1 trillion stockpile of U.S. Treasury securities. While China remains the largest foreign holder of our sovereign debt, their ownership has been declining over the years from a high of 9% in 2011 to 5% currently. Abruptly selling a significant portion of their U.S. Treasury holdings is unlikely, since the resulting drop in Treasury prices would injure them as well. Selling or avoiding purchases of U.S. Treasuries would also leave them with fewer alternatives to invest the large supply of U.S. dollars they receive in payment for the goods we purchase.
Equities had turned positive during the week on the now validated news that we are extending the decision deadline on auto tariffs with Europe and Japan for six months. Still, we should expect continued volatility both up and down until there are more certain developments on numerous trade issues. Uncertainty typically forces markets to build in overly negative guesstimates for future company earnings and economic growth prospects. Once clarity removes unknowns, expectations and thus prices can adjust from the worst-case scenario levels. As of yesterday’s close, the S&P 500 is down 2.4% from its previous high. That may sound discouraging; but the current bull market has survived six, 10% or greater declines and three, 15% or greater declines since its start on March 10, 2009.
While economic signals have been mixed, of late they have been more positive. Yet trade has captured the almost singular focus of Wall Street. A conclusion to conflicts with our trading partners, especially China, should have a positive effect on corporate earnings estimates, market sentiment, and the global economic outlook.
In the meantime, we encourage investors to avoid reacting to market shifts based on speculation. Rather, take advantage of pullbacks to add to equities if below your long-term allocation target and use periods of higher prices to trim if your allocation has moved up too far out of range.
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.