What’s on Tap: U.S.-China Trade Talk Rises Above the Din

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  • Trade Impasse Sparks Stock Market Volatility

  • No Consumer Tariff Pinch (Yet)—Despite Trade-War Drama

  • Financial Planning Friday: Disability Insurance

  • Looking Ahead to Home Sales, Jobless Claims and Fed Meeting Minutes

It’s all about China, still. Retaliatory tariff talk sent stock markets slumping to their worst day in months on Monday—the Dow Jones Industrial Average and the S&P 500 index each fell 2.4% and the tech-heavy Nasdaq Composite declined 3.4%. Then, just as these major indexes were on course to recoup those losses, China cast doubt on the prospects for future trade talks and stocks slumped again this morning before rising into the early afternoon hours.

In fact, the U.S. economy continues to grow, and consumers continue to spend. Anyone can observe how headlines move markets on any given day, but a trader betting against a fully employed and confident American consumer runs the risk of losing out to an investor with a more objective and long-term view.

For the year through Thursday, the Dow Jones Industrial Average and the broader S&P 500 have returned 11.9% and 15.6%, respectively. The MSCI EAFE index, a measure of developed international stock markets, is up 10.4%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has dipped 2.90% from 3.28% at 2018’s end. On a total return basis, the U.S. bond market has gained 3.5% for the year.

Trade Impasse Sparks Stock Market Volatility

It doesn’t take an economics degree to recognize that the stock markets have become more volatile. Over the last week, markets have been moving up and down in larger jumps than we’ve seen over the past several months. The VIX (Cboe Volatility Index), also known as Wall Street’s “fear gauge,” is a measure of volatility based on market expectations for the next 30 days. In the last nine trading sessions, the VIX has moved 20% or more on three days—with two of those three ranking among the 100 most-volatile trading days in the VIX’s 19-year history. 

Source: Cboe Options Exchange.

Source: Cboe Options Exchange.

The VIX is prone to convulsions during times of significant uncertainty, but markets can also be calm for extended periods of time—stability around a long-term average is the exception, not the rule. Volatile markets can create more noise for tactical investment strategies to sift through to identify trends, but they are also often the best short-term opportunities to pick up attractive investments for long-term gains.

No Consumer Tariff Pinch (Yet)—Despite Trade-War Drama

Retail sales reportedly dipped 0.2% in April, but that’s coming off a smashing March spending spree when sales increased 1.7%. We read the April dip as noise—monthly retail figures are historically volatile—particularly given that Walmart, the world’s largest retailer, reported strong first-quarter earnings. Small-business optimism hit a four-month high in April and stronger home sales in May are boosting builders’ confidence. 

Trade-war consternation hasn’t been able to overwhelm consumer confidence. Part of that confidence may be because the imported items from China subject to tariffs are not the ones consumers most want and need. To date, clothes, shoes, toys, electronics and smartphones (the iPhone in particular) have not been impacted. That said, it’s estimated that the most recent round of duties will cost the average family of four $767 a year, but those increased costs have yet to be felt. Fundamentals remain strong even as headlines sound the alarm.

The trade drama with China has and will likely continue to overshadow economic fundamentals in the media. The next face-to-face meeting between President Trump and President Xi appears to be set for the June-end G-20 summit in Japan. That leaves weeks where tweets, leaks and sudden changes in strategy could lead to increased uncertainty and volatility—a force investors will have to contend with. And trade levies aren’t etched in stone: Just today, the Trump Administration delayed increasing tariffs on imported cars and auto parts from European and Japanese manufacturers by six months. Hours later, the White House struck a deal with Canada and Mexico to lift steel and aluminum tariffs imposed in March 2018.

The current negotiations with China are merely the latest salvo in what’s likely to be ongoing trade squabbles between these two economic behemoths. We expect face-saving deals, threats, product bans and retaliation amid actual progress to define our relationship with the Chinese over the next generation. Long-term, mutual benefits should create ample investment opportunities at home, within China and in the global markets.

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Financial Planning Friday: Understanding Disability Insurance

You can’t sugarcoat it: Disability insurance isn’t as pleasant to think about as planning a two-week cruise or buying a vacation home. But if you are (or someone you love is) still working, this insurance is one of the most important—and overlooked—components of a solid financial plan. Here are some fundamentals worth knowing.

Why You Need Coverage: While working, your earnings are one of your most powerful financial assets. Disability insurance protects that salary by providing you with a source of income if you are unable to work due to an accident or serious illness. Unfortunately, a disability that prevents you from pocketing paychecks is more likely than you may think. According to the Social Security Administration, more than one in four 20-year-olds today will experience a disability that lasts 90 days or more before they reach the age of 67.

The Basics: Disability policies are generally broken up to two broad categories—short term and long term. Short-term policies typically replace 60% to 70% of your base salary. Benefits last anywhere from a few months to a year, and may have a short waiting period before benefits kick in.

Long-term policies tend to replace 40% to 60% of your base salary and will continue to pay out as long as you’re out of work or until retirement, depending on the policy. Long-term policies ordinarily begin paying benefits 90 days after you are disabled; this waiting period is one reason a well-funded emergency reserve is critical.

How to Get Disability Insurance: If your employer offers a policy, sign up. If you’re self-employed or your employer doesn’t include one in your benefits package, you can purchase an individual private policy from an insurance company. Most personal policies offer long-term coverage, but you can also find some providers that offer short-term policies.

Key Terminology: Make sure that you understand your policy’s definition of disability. “Own occupation” polices are more expensive but the least restrictive. Benefits kick in if you are unable to perform the duties of your current job or the one you’re qualified for.

“Any occupation,” on the other hand, defines disability as the inability to do any type of work. This type of policy will be cheaper—the provider is less likely to have to pay out if you can do another job, even low-paid work. Among other policy details, you will also want to make sure that your policy covers you for the remainder of your working life.

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Looking Ahead to Home Sales, Jobless Claims and Fed Meeting Minutes

The last two weeks have been relatively light on the economic-data front. Next week will be more of the same, as we receive reports on existing home sales, jobless claims and durable goods as well as the minutes from the recent Federal Reserve  meeting.

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 17, 2019, prior to the market’s close.

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