What’s on Tap: Shots Fired in Tariff Battle

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  • Strong Economic Trends Continue: Hourly Earnings Rise
  • Dan Kemp’s Momentous Market Claim
  • Our Investment View on Stock Market Valuations & Risk
  • Looking Ahead: Consumer Credit, Big Bank Earnings & More

Tariffs on $34 billion in Chinese goods went from threat to reality overnight, prompting immediate and equivalent retaliatory duties on American products. Investment markets largely took the first salvo in a potential trade war in stride. The question now: Will cooler heads prevail, or will subsequent rounds of revenge and reprisal escalate the battle?

At this point, investors have remained calm as continuing positive economic news trumps trade-war fears. With second-quarter earnings-reporting season on the horizon—expectations are for earnings to come in 20% higher than the same time last year—we’ll be listening closely to companies’ outlooks on how tariffs may or may not impact their bottom lines going forward. Given lower taxes, job-market strength and wage growth, we continue to believe that it remains a fool’s errand to bet against the U.S. consumer.

For the year through Thursday, the Dow Jones Industrial Average has dipped 0.3% as tariff concerns are weighing on large, multinational corporations. The broader S&P 500 has gained 3.4%. The MSCI EAFE index, a measure of developed international stock markets, is down 3.0%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.30% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 1.5% for the year.

Strong Economic Trends Continue: Hourly Earnings Rise

Employers hired workers at an impressive pace in June, creating 213,000 new jobs in an economy already operating at or near full employment. The headline unemployment rate ticked up to 4.0% from 3.8% as more jobseekers left the sidelines and pounded the pavement. As businesses continue to report difficulty finding qualified employees, workers have benefitted with average hourly earnings rising 2.7% from where they stood a year ago.

The Institute for Supply Management’s survey of factory activity for June indicates that the manufacturing sector continues to expand and demand remains robust. Producers’ main concerns are growth problems: Difficulty finding the supplies they need in order to meet healthy demand for their goods, as well as landing and retaining skilled labor. We are not surprised that manufacturers report serious concerns about tariff-related activity—something they (and we) are keeping a close watch on.

The service sector, which represents about 80% of U.S. economic activity, saw its strongest quarter in three years between April and June as companies report greater client demand and acquisition of new customers and lines of business.

This fairly rosy economic picture must augur well for stock market gains, right? Not everyone agrees… 

Dan Kemp’s Momentous Market Claim

You may have seen Dan Kemp, Morningstar’s chief investment officer for Europe, the Middle East and Africa, making a claim that was featured on MarketWatch that the next 10 years will be a lost decade for U.S. stocks.

At the core of his argument is the disparity in valuations between U.S. stocks and their European counterparts, which he believes justifies his ominous claim. If the argument (but not the stridency) sounds familiar, well, it’s a point we’ve made time and again.

While U.S. stocks might see a lost decade, predicting so is either purposely alarming or merely marketing alarmism. Kemp, whose bailiwick is the European markets, may simply be “talking his book” with his bullish view on Europe.

The least convincing part of Kemp’s claim is the momentary foundation of it: “Our expectation at the moment…” One can make any statement about anything “at the moment” only to change it the next. We see this momentous claim as having all the predictive quality and staying power of a New York minute.

Our Investment View on Stock Market Valuations & Risk

Yes, stock market valuations reflect the remarkable recovery from the Great Recession, and we see a greater number of opportunities in foreign markets relative to our own. We continue to have confidence in our investment strategies that are designed to identify positive trends in markets around the globe.

If the U.S. economy cracks, the U.S. market fissures, European markets splinter and emerging markets fracture. Maybe this time will be different, but we wouldn’t bet on it. In such a scenario, the flight to quality would lead investors toward the U.S. market, not away from it. In our view, the pipe dream of thinking that stock valuations and risk can be decoupled from the U.S. isn’t laughable so much as it is dubious.

Looking Ahead: Consumer Credit, Big Bank Earnings & More

Next week, we’ll get reads on consumer credit, small business confidence, job openings, inflation and consumer sentiment. We’ll also see earnings Friday from Citigroup, JPMorgan Chase, PNC and Wells Fargo as the big banks kick off second-quarter reporting season.

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, July 6, 2018, prior to the market’s close.

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