November 2019 Market Insights

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    Brad T. Gregory
    Portfolio Manager & Research Analyst
    Investment Operations Manager

    U.S. equity markets rebounded from a rocky start in October, gaining 2.2% for the month as measured by the S&P 500 index. Investor optimism rose after the announcement of progress towards “phase one” of a trade deal between the U.S. and China. Equities maintain upward trajectory into November, with equity markets hitting and remaining within striking distance of all-time highs as of this writing. With daily updates regarding trade deal progress and/or setbacks, it is important to revisit why this is driving market movements in the first place.

    The global economy is more interconnected than at any time in history. We are able to move goods, services, technology, and capital across borders more efficiently than ever before. Therefore, the health of the world’s two largest economies has a big influence on global economic conditions. The United States is the world’s largest economy with a gross domestic product (GDP) of $20.5 trillion in 2018. China is the world’s second largest economy, producing $13.6 trillion in 2018. Combined, the two countries account for about 40% of the world’s GDP and have a similar share of the world’s GDP growth.

    The preferred choice of ammunition for this trade war has been tariffs placed on goods exchanged between the two countries. Overall, tariffs enacted on Chinese goods by the U.S. government will hinder U.S. growth. For example, companies may experience higher costs to build their product, reducing their ability to invest in new projects, expand operations, or hire new employees. Companies often pass along higher costs directly to consumers by increasing prices. When prices begin to increase, consumers cannot afford as much “stuff”, slowing growth in the economy. Consumer spending accounts for about 70% of GDP in the United States.

    Negotiations between the two countries are ongoing, and economic analysts will weigh the impact of any new developments on GDP growth. Given the scale of the two economies at stake, market participants are also considering the impacts to the global economic landscape. We continue to expect increased volatility, as markets attempt to price this future growth. During this period, it is important to remember that both sides stand to benefit long-term from an agreement. With this long-term view in mind, we recommend sticking with the appropriate investment allocation corresponding to your financial plan.

    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.