What’s on Tap: It’s All About Tariff Negotiations

  • China Talks Aren’t a China Syndrome; Diversification Remains Key

  • U.S.-China Trade Deal in the Making?

  • Tariffs Woes or Trade Wars? Economic Data Governs Investment Strategy

  • Financial Planning Friday: Preparing to Buy a House

  • Looking Ahead to Scant Economic Data

The recent strength demonstrated by both the U.S. and the Chinese economies emboldened each country to toughen its stance as they tried to find a workable trade agreement. But U.S.-China negotiations turned into a pumpkin, if temporarily, as clocks struck midnight Friday morning. Despite ongoing talks, the Trump administration increased a levy on $200 billion of Chinese imports from 10% to 25% and threated to add more than $300 billion of other imports to the tariff list. China has vowed to retaliate in kind.

For all the uncertainties that have arisen of late, markets remain broadly higher with the Dow Jones Industrial Average having returned 11.6% for the year through Thursday, while the broader S&P 500 has climbed 15.3%. The MSCI EAFE index, a measure of developed international stock markets, is up 9.7%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has dipped to 2.95% from 3.28% at 2018’s end. On a total return basis, the U.S. bond market has gained 3.2% for the year.

China Talks Aren’t a China Syndrome; Diversification Remains Key

Markets have not exactly melted down as disagreements with China have heated up. Wall Street traders have swatted away a swarm of bugbears, from the so-called “earnings recession” and North Korean bombast to Brexit bewilderment, unmet inflation worries and Mueller Report disputes. Still, you can’t ignore the fact that Sunday’s tweets from President Trump threatening to raise tariffs on Chinese imports sent both U.S. and China markets into decline.

China’s Shanghai market dropped 5.6% on Monday and ended the week down about 4.5%, though it’s still up around 18.0% for the year. That’s not bad, but it’s a far cry from the 31.2% year-to-date peak return it reached on April 19.  

Note: Chart shows cumulative year-to-date local currency index-level returns of the SSE Composite Index through 5/10/19.  Sources: Morningstar Direct and  The Wall Street Journal .

Note: Chart shows cumulative year-to-date local currency index-level returns of the SSE Composite Index through 5/10/19.

Sources: Morningstar Direct and The Wall Street Journal.

Compared to Shanghai’s decline, the S&P 500 index’s 2.5% drop for the week through Thursday seems relatively benign—but this belies trader skittishness. The VIX index, known as Wall Street’s “fear gauge,” has soared nearly 50% higher as selling pressure has mounted.

Weeks where uncertainty and market volatility spike demonstrate the importance of diversifying our investments and taking as much emotion out of the equation as possible. Disciplined investment strategies with built-in defenses against downtrends are there to act as anchors to windward when the market seas get choppy.

U.S.-China Trade Deal in the Making?

To us, the flare-up in tensions around the U.S.-China trade negotiations are indicative of the final stages of making (or breaking) a deal. The issue today: The U.S. claims China is backtracking on themes relating to “forced technology transfer”—effectively, China forcing any firm doing business within the country to disclose its underlying intellectual property, creating an unfair advantage.

Challenging China as publicly as President Trump’s tweets did last weekend gave the country no way to save public face, a cultural slap that is hardly the stuff of textbook diplomacy. In bilateral talks, the road ahead will always be potholed by one side or the other calling foul and making threats, but we seem to be in new territory in this latest attempt to hold China to higher standards of mutually beneficial trade.

Tariffs Woes or Trade Wars? Economic Data Governs Investment Strategy

The bottom line is that there’s no way to sugarcoat the increasingly combative rhetoric and tariff action: Higher tariffs ultimately translate into higher prices for businesses and consumers, and as the 25% tariffs on $200 billion of Chinese goods go into effect, we could see inflation shake off its lethargy. Adding tariffs on the rest of our Chinese imports will stoke the inflation flames even more.

The Chinese also have a trump card at hand: Their enormous store of U.S. Treasury bonds. Should Chinese policymakers decide that an all-out battle over trade requires new weaponry, sales of stores of Treasurys could wreak havoc on the bond market, sending yields higher.

Plus, the Chinese government could allow their yuan to weaken relative to the U.S. dollar while placing increasing pressure on its growing and more affluent middle-class to buy local. This would benefit Chinese companies, making their stocks more valuable. Long-term growth-oriented investors would in turn benefit from greater domestic demand in China.

As dire as some of this may sound, the persistent slow-growth U.S. expansion isn’t going to be derailed by the current tariff regime—the International Monetary Fund estimates a resulting 0.2% hit to economic growth. The U.S. consumer—the driver of the American economy—remains positioned to keep buying even as prices of goods coming from China go up, particularly if the yuan weakens relative to the dollar.

So now we wait to see if the U.S. and China can each get their trade cake and eat it too. We will be focused on the fundamental economic data—earnings, interest rates, consumer and business trends—that inform our long-term investment strategy.

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Financial Planning Friday

Preparing to Buy a House

The spring homebuying season is in full swing and there’s good news for would-be purchasers—after years of rapid increases, prices are rising at the slowest annualized pace since September 2012. And mortgage rates remain reasonable.

Whether you are thinking of buying for the first time or want to brush up on the process before reentering the market, here’s how to ensure your ducks are in a row when you find your dream house and are ready to make a competitive bid.

1.  Check your credit. Every 12 months, you can request a full credit report at AnnualCreditReport.com  from each of the three major credit bureaus: Equifax, Experian and TransUnion. The report details your credit history so you can understand exactly how your credit score is being calculated. Correcting any mistakes in your credit history will improve your score, which can help you qualify for lower interest rates on loans.

2.  Determine your budget. How big of a mortgage payment can you afford? You’ll need to take current interest rates in your region into account (available at MortgageCalculator.org). Typically, we recommend that your costs from principal, interest, taxes and insurance should be no more than 30% of your monthly pretax income. Loan companies will often lend up to 45% of your income before taxes—don’t count on the bank to tell you how much you can truly afford, though.

3.  Decide where your down payment will come from. A dedicated, liquid source of funds for your down payment is important if you’re ready to buy, or even thinking about it. If you’ll be making an offer on a house in the next few months, we recommend keeping your down payment funds in a money market account or a high-yield savings account.

4.  Secure mortgage pre-underwriting. The difference between being pre-approved and pre-underwritten for a mortgage is subtle but important. Basic pre-approval lets you know how much a bank will lend you based on a quick assessment. Getting pre-underwritten takes it a step further; it means the bank has committed to giving you a loan up to a certain amount. This makes your offer more attractive to sellers, because you can leave out the back-out contingency for having your mortgage application rejected. It may be in your best interests to have this done in advance, particularly in a hot housing market.

5.  While certainly not an exhaustive list, we hope these practical tips will be helpful to anyone preparing to buy a home. Good luck on your house hunt!

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Looking Ahead to Scant Economic Data

Next week, we’ll be watching the scant economic reports scheduled: Small business confidence, retail sales, housing starts and permits, manufacturing gauges and consumer sentiment.

Like this week, the absence of fundamental data creates the kind of vacuum volatility likes to fill. We expect to hear a lot of noise and not too much signal.

If you’d like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note: This update was prepared on Friday, May 10, 2019, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

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