- Tariff Disputes and Trade-War Fears
- Summit Diplomacy—Maybe
- Economic Data Sets Say Continued Growth
- Looking Ahead
This week, U.S and foreign stock-market gains were driven by mostly positive economic data and reports. Credit for the week’s tone can also go to the absence of negative event-driven news and perhaps a kind of opaque optimism ahead of next week’s historic North Korea-U.S. summit.
For the year through Thursday, the Dow Jones Industrial Average has returned 3.2%, while the broader S&P 500 index has gained 4.5%. The MSCI EAFE index, a measure of developed international stock markets, is up 0.2%. The yield on the Bloomberg Barclays U.S. Aggregate Bond index climbed to 3.32% on Thursday from 2.71% at year-end. On a total return basis, the U.S. bond market has declined 2.0% for the year.
Technology stocks and smaller fare drove several market indices to highs this week, as the NASDAQ Composite, the Russell 2000 and the S&P SmallCap 600 all notched records on Wednesday before falling back fractionally. Energy stocks also pushed the Dow and S&P 500 higher during the week as oil prices rose again towards $70 per barrel.
Tariff Disputes and Trade-War Fears
Today and tomorrow mark the 44th G7 summit—formerly known as the G8 before Russia was dismissed from it over their Crimean incursion and annexation. (G7 is shorthand for the “Group of Seven”: Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.) This time around, the G7 is set to focus on the U.S. tariffs on steel and aluminum imported from some of our closest allies—Canada, Mexico and the European Union (E.U.).
While these countries had been granted relief to allow time for negotiations, President Trump drew a deadline in the sand and his hourglass ran out. This doesn’t mean that negotiations won’t be ongoing—they will be, though our president has decided to skip the conclave’s second day in a bit of high-stakes posturing. We continue to think that economic self-interest for all parties will drive them toward a more equitable trading compact.
But, not surprisingly, G7 members are not taking the tariffs sitting down. On Tuesday, Mexico imposed tariffs ranging from 15% to 25% on U.S. exports, including pork, steel products and bourbon. The levies impact just 1% of all U.S. exports to Mexico but are meaningful for the targeted industries.
Canada has announced plans to retaliate with its own set of tariffs aimed at steel and aluminum as well as agricultural and consumer products, while the E.U. announced tariffs on roughly 200 U.S. products. The tariffs from Canada and the E.U. won’t go into effect until July—if they do at all.
With the U.S. economy approaching $20 trillion in size, it is hard not to see the current level of tariffs as minor inconveniences overall. Our characterization of where we are: Trade skirmishes en route to more potent and damaging trade-wars if current contentions are left unresolved.
We are cautiously optimistic that level heads will prevail after this weekend’s G7 summit, which, we suspect, will see more political posturing than policymaking given the U.S.’s truncated attendance. Meantime, headline fears and early morning tweets will continue to keep investors on edge for the foreseeable future. Nevertheless, we will stay focused on earnings, interest rates, economic data and reports to inform our investment approach and decision-making.
As the weekend approaches, we are on the threshold of an historic moment: The scheduled June 12 summit in Singapore between the leaders of North Korea and the U.S. While any hope of a positive outcome is chimerical, the fact that this summit is now highly probable is undeniably positive. The goal of the summit, and who benefits by what amount, remains unclear. Still, North Korean leader Kim Jong-un indicated to Secretary of State Mike Pompeo that he’s prepared to denuclearize the hermit kingdom.
In terms of investor reaction, we think there is perhaps a slight positive tilt to stock markets globally. The aftermath of the meeting (positive or negative) might see a more pronounced market view and reaction though we think the most concrete outcome could be simply agreeing to talk further.
Economic Data Sets Say Continued Growth
After last week’s full cupboard of positive market data, this week was fairly bare bones. What we’ve seen so far: Factory orders rose a bit once the always-volatile aircraft orders were backed out of the numbers. Indeed, weakness in aircraft orders offset a strong showing for capital goods—indicating that business investment continues to grow.
The service sector (accounting for 90% of our workforce) is expanding at a rapid clip (with job creation and new orders both marginally up from the prior month); and job openings hit a record high—a bullish indicator that workers are confident enough to leave current positions in pursuit of more interesting and higher-paying jobs.
The investment trend we see: Expansion (a.k.a. growth) persists here in the U.S. despite tariff disputes and trade-war mongering.
Investors and traders can look forward to a headline-filled week. The North Korea-U.S. summit in Singapore will garner the world’s attention on Tuesday. On Wednesday, the Federal Reserve’s Open Market Committee will likely conclude its two-day meeting with an expected 0.25% interest-rate hike and a press conference hosted by Fed Chair Powell. On the economic front, we’ll get updated inflation data for the consumer and producer price index as well as a reading on retail sales during the month of May.
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Please note: This update was prepared on Friday, June 8, 2018, prior to the market’s close.
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