PMC Weekly Review - April 13, 2018

A Macro View: “Global Synchronicity Fading With Every Breath You Take"

Stock markets across the globe enjoyed a blockbuster year in 2017, as a confluence of positive economic and earnings data emboldened market bulls. Participants largely shook off the fact that valuations, particularly in the US, were priced such that heightened volatility could only be averted by a perfect scenario. In early 2018, a series of mostly headline and macroeconomic events has led to sharp selloffs, albeit typically accompanied by quick rebounds, and volatility has increased sharply. Each issue facing equity markets has implications in both the short and long term, with further effects hanging in the balance. With volatility elevated by macro and headline news, it’s worth briefly delving into these issues.

Tech stocks, both in the US and abroad, have enjoyed a strong rally over the last several years. In the US, the so called FANG stocks (Facebook, Amazon, Netflix, and Google) have led markets and have become increasingly important to overall market returns, despite their high valuations. In recent weeks, however, the S&P 500 has sold off, led by the Information Technology sector and the FANG stocks. Headline news has ensnared two of the four FANG stocks, Facebook and Amazon. Facebook has increasingly come under scrutiny as its privacy policy has been questioned openly, culminating in its founder, Mark Zuckerberg, testifying before Congress. Amazon has faced pressure, as President Trump has openly targeted the company for its contract with the US Postal Service to deliver packages and for its supposed light tax burden. Regardless of the validity of these complaints, the public airing of grievances by the President has affected Amazon’s stock adversely in recent weeks. Although it appears these are company-specific issues, the tech-related stocks have sold off in concert with these representative stocks.

On the global stage, a very public fight over trade policy between the world’s two largest economies also has made markets jittery. After initially announcing a planned tariff on all steel and aluminum imports to the US, President Trump directed his ire specifically at China by initially announcing a 25% tariff on a series of imported goods from China, totaling $50 billion. In response, China targeted US agriculture exports, from soybeans to hogs, as well as the aerospace industry’s aircraft exports. The escalation in tone between the two countries has raised the prospect of the first full-on trade war since the 1930s. Markets have since lurched between losses and gains, as participants try to digest these actions and distinguish between bluster and policy. Note that none of the proposed tariffs have been enacted by either side, but the uncertainty has added significant volatility to global equity markets.

While it has yet to fully play out, the rosy picture of global synchronized growth that propelled stocks higher is in question. In the US, the March jobs report came in notably weaker than expected, and wage growth remains muted. In addition, total construction spending has been flat, and retail sales have declined so far this year. In Europe, inflation has struggled to move above 1% and lags far behind the European Central Bank’s goal of 2%. Wage growth in the EU also has been muted recently. In addition, leading economic indicators have moderated recently, albeit from elevated levels. For example, the eurozone’s purchasing managers survey for the manufacturing and services sectors has pulled back from multiyear highs in January. In Asia, China’s manufacturing activity declined sharply in February, falling far short of expectations. It is clear that global economic activity has soft spots.

Volatility has definitely increased over the last few months in markets worldwide, caused largely by headline news stories, but it is unclear whether it will have an adverse effect on the global economy. Meanwhile, the softer-than-expected economic indicators from every major region have cast a shadow on the synchronized global growth story. It remains to be seen whether the most recent economic data from various global regions is merely a speed bump on the backdrop of synchronized global economic expansion or a harbinger of times to come.

Dan Homan, CFA
Investment Research Analyst

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