What’s on Tap: Trade-War Feints Eclipse Fundamental Economic Strengths

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  • Trade-War Rhetoric Escalates With Rare-Earth Tariff Response

  • Bond Investors Steepen Yield-Curve Inversion

  • Financial Planning Friday: 529 Plans 

  • Looking Ahead to Car Sales, Job Reports and Fed’s Beige Book

Wall Street sentiment is being driven by tweets.

Redirecting his ire from China to South America Thursday night, President Trump took to Twitter with a threat to impose a 5% tariff on all Mexican imports—the latest effort to compel stronger border security from our third-largest trading partner. Of course, the ongoing trade dispute with China as well as the continuing confusion over Brexit is roiling Wall Street.

The U.S. economy keeps charging ahead. The most recent data on economic growth reflected an economy that grew at a 3.1% annual pace during the first three months of the year—slow growth, not no growth. For all of the trade-war headline turmoil, consumer confidence is at a six-month high. After all, it’s hard to keep a fully employed U.S. consumer down.  

Headline risk is a constant for investors and we’ve had more than our fair share over the past month. As you know, we’ve developed several custom tactical investment strategies over the years that help us to read the market’s signals and react to them in a timely manner. We don’t trade every time a talking head starts yelling that the sky is about to fall. But if the data we’ve built our strategies on signals us to do so, we will begin to build a defensive position in our portfolios. We believe our level-headed approach and sharp eye on the markets should allow you to enjoy your summer.

Despite a tumultuous May, the Dow Jones Industrial Average and the broader S&P 500 have returned 9.0% and 12.2%, respectively, for the year through Thursday. The MSCI EAFE index, a measure of developed international stock markets, is up 8.1%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has dipped to 2.77% from 3.28% at 2018’s end. On a total return basis, the U.S. bond market has gained 4.4% for the year.

Trade-War Rhetoric Escalates With Rare-Earth Tariff Response

After weeks in which the U.S.-China trade fight was marked primarily by the escalating imposition of U.S. tariffs, China revealed it may have its own subtler tricks up its sleeve. China’s state-owned Global Times cautioned in an editorial that if the U.S. impedes the country’s economic development, “China will use rare earths as a weapon.”  

As we discussed last week, China produces 80% of the world’s rare-earth metals—the necessary ingredients for everything from spark plugs to semiconductors, energy-efficient lightbulbs to x-ray machines; pretty much anything to do with the technology we use every day. 

While there’s been little news of new or ongoing conversations between U.S. and Chinese trade negotiators, this latest gambit has surely sparked some back-channel communiques, at a minimum. It would be in all parties’ best interests if a full-scale trade war was averted. In the meantime, while rare-earth metals companies’ stocks have soared, China’s stock market has taken a tumble and is down 6.1% for the month.

Bond Investors Steepen Yield-Curve Inversion

Even as the economy continues to demonstrate strength with a fully employed workforce and robust corporate earnings, some investors have begun to shift assets into bonds. U.S. Treasurys, the go-to in times of uncertainty, have benefited the most and as prices have risen, yields have fallen. The benchmark 10-year Treasury’s yield has again dropped below the 3-month Treasury bill’s yield—a so-called “inverted yield curve” where shorter-maturity bonds sport higher yields than their longer-maturity counterparts. With the 3-month Treasury out-yielding the 10-year by 0.11% this week, the steepest inversion since 2007, you may have heard one of the many pundits rushing to proclaim a recession is on the horizon. 

As we’ve discussed before, the inverted yield curve does have predictive qualities, having preceded the last seven recessions. So it should not be easily dismissed. However, the inverted yield curve is not a Swiss watch you can set your recession timing to. On average, there has been a lag of more than 12 months between the yield curve’s inversion and the start of a recession—and even then, we often don’t know that a recession has started for several more months.

Keep in mind that while predicting the last seven recessions sounds impressive, it is a very small sample size. Additionally, an inverted yield curve doesn’t tell us the length or severity of the next recession, nor how the stock market will perform before or during it. 

We are keeping a close watch on the yield curve. But we view it as one factor among many that we consider when it comes to evaluating the state of the economy, the markets and the composition of your investment portfolio

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Financial Planning Friday: 529 Plans

It wasn’t exactly a national holiday, but Wednesday was May 29 (or 5/29), sparking increased talk in the media about 529 plans—tax-advantaged investment accounts designed to save for tuition and other expenses related to private K–12 and higher education.

529 plans are a relatively simple concept: Think of them like a Roth IRA, only for education savings rather than retirement. The money you invest today grows tax-free and can be withdrawn tax-free for approved education expenses when needed down the road. These plans are popular among parents, grandparents and anyone with a young scholar in their lives, for good reasons.

If you’d like to learn more about how to get started with a 529 plan, we have it covered.

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Looking Ahead to Car Sales, Job Reports and Fed’s Beige Book

After a weeks-long drought, next week provides a shower of useful economic data. We’ll be looking closely at service and manufacturing sector surveys, construction spending, car sales, factory orders, job reports (including May’s unemployment rate), average hourly earnings, consumer credit and the Federal Reserve’s “Beige Book” of anecdotal reports from around the nation.

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 31, 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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