This weekly report presents insights from our Global Investment Management team.
A potential trade war between the U.S. and China sparked a selloff in global stock markets last week as investors attempted to comprehend the impacts of a tit-for-tat battle in international trade.
Volatility gripped markets after President Trump announced new tariffs on $50 billion worth of Chinese imports and declared more were on the way in an effort to curb the alleged stealing of intellectual property and trade practices that are generally perceived as unfair to foreign companies operating in China. China responded, supposedly to steel and aluminum tariffs imposed earlier in the month, with a potential tax on 128 U.S. products worth over $3 billion – a measured reaction compared to the U.S. proposal. Both the S&P 500 and the Dow Jones sank over 4.50% in trading on Thursday and Friday, while global markets declined 3.38%, according to MSCI data. The yield on the 10-year Treasury dropped 0.07% to 2.81% as investors moved to safe-haven assets.
These declines may have been an overreaction from markets, but volatility is back and it’s here to stay. In our view, the geopolitical shock from the tariff announcements was just one of the major causal factors for the pullback in stocks. We have continually discussed the current market environment, highlighting elevated valuations in the U.S. and the potential for increased volatility from fundamental drivers and potential challenges in monetary and fiscal policy. Worries over an escalation into a full U.S.-China trade war were quelled on Monday when the Trump administration sent a letter to Chinese officials stating specific requests to reduce the trade surplus with the U.S. The S&P 500 recovered 2.72% on the news, while the Dow Jones leaped almost 670 points – its largest one-day point gain since 2008. However, the seeming calm in the markets was very short-lived.
After floating around positive territory, stocks abruptly sold off on Tuesday afternoon, led by the technology sector. The largest segment of the S&P 500 dropped as much as 3.25% yesterday before a small upturn. The potential trade war may be to blame again as investors were spooked after a report from the Treasury Department showed officials may be cracking down on Chinese investment in certain U.S. technologies. Growing criticism of Facebook user privacy and CEO Mark Zuckerberg’s planned testimony before Congress only added to investor woes, while Twitter plummeted almost 13% over news that it may be more vulnerable to privacy regulation than previously thought.
The Global Investment Management team has been discussing the ongoing geopolitical climate in our Investment Insights, and we are monitoring international policy changes closely. While we do believe the initial selloff was an overreaction by markets, a trade war between the U.S. and China would be a significant blow to global trade and globalism generally. Assuming a similar retaliation from China, the negative effects on the GDP of both countries may be minimal, but the ripple effects – as experienced by the technology sector on Tuesday – could be significant. It is important to remember that China is the largest single holder of U.S. debt and may be willing to use that fact as leverage in negotiations with the U.S. As Edwin Starr once said, what is war good for? Absolutely nothing.
Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
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