PMC Weekly Review - June 29, 2018
A Macro View: The Global Trade Predicament: Positioning America’s Knights, Pawns, Rooks, and King
A game of global proportions is taking place on Wall Street right now….and contrary to what the large crystal LCDs flickering in the background of several prominent trading desks would suggest, it’s not the World Cup. Rather, it’s a centuries-old game of whist and precision, two parts strategy and one part luck. And quite serendipitously for our discussion this week, some historians believe it originated in China.
The market has been rattled this June over concerns of a global trade war. Investors fear that President Trump’s proposed tariffs could lead to retaliatory measures from trading partners around the world, which in turn could foster a global recession. These concerns have been echoed by the European Union and China, each of whom faces the possibility of growing and costly tariffs. The US has threatened China with tariffs on up to $250 billion of its imports, and Europe with heavy tariffs on metals and imported cars, which combined could affect more than $300 billion in commerce, prompting these countries to take action together and respond in kind. And, the reverberations of this threat can already be felt across the markets, with the US, European, and Chinese markets declining in unison. Notably, the yuan, which typically trades within a tight band to the US dollar, hit a six-month low on Wednesday and sent Chinese stocks rattling to official bear market territory, as the Shanghai Composite slid more than 20% from its January high. With China and Europe being such considerable market forces, let’s hope our rook and pawn are up to the task of holding their ground against their two knights, or we might be in a bind.
It certainly seems like all parties involved have a lot to lose at the table, with consumers left wondering whether they themselves will turn into sacrificial pawns as fears over higher prices and inflation ensue. Some companies like Harley Davidson have already responded creatively, announcing plans to build their motorcycles for European clientele overseas, but it is hard to envision a scenario where at least some portion of global trade cost is not absorbed by the average household.
Of course, this game of Chess does not have the benefit of taking place in a quiet room isolated from outside variables and patrolled by ardent tournament directors. Indeed, many other ‘noises’ in the background duly influence the health of the market and economy overall. Among the leading indicators this week, domestic initial jobless claims rose more than expected, increasing to 227,000 from the previous week’s report of 218,000. US GDP growth also rang in lower than expected, with a report of 2% for the first quarter of 2018, in contrast to market expectations of 2.2%, and driven largely by a decline in business inventories and personal consumption. The housing picture remained robust, with new home sales in May increasing 6.7% to 689,000. And, the price of a barrel of oil continued to climb, hitting a three-and-a-half-year intraday high of more than $73 a barrel on Thursday, following earlier reports of a decline in Canadian and Libyan inventories and the US’s call for its allies to cease all Iranian oil imports by November.
Also noteworthy, Justice Anthony Kennedy announced his retirement from the Supreme Court on Wednesday, effective July 31, paving the way for President Trump to choose the second Supreme Court Justice since he took office. Justice Anthony Kennedy was long considered a swing voter, and if the President holds true to his campaign promise, our nation’s highest court likely will be shrouded in a veil of conservancy for decades to come.
Overall, whether the President’s trade tactics will prove to be an act of brilliancy or a massive blunder is difficult to say at this stage in the match. Trade protectionism certainly seems like an antiquated notion in a day and age of free trade, where global walls have largely come down and countries have embraced a model of producing goods and services where they have a competitive advantage and/or economies of scale. However, as with Chess, even decisions that require one to anticipate an opponent’s move ten steps in advance can sometimes fall prey to more chance than circumstance. A fair number of unknown variables make it almost impossible to calculate with any precision what the impact will be on financial markets, due to the range and complexity of the scenarios involved. Accordingly, it may be a wise course of action to remain invested—albeit with additional consideration for investments that offer hedging, inflation protection, or unique diversification properties—and to continue to recalibrate portfolios as new data become available. Nonetheless, we can take comfort in the idea that the global economy is not a zero-sum proposition but rather a delicate balance where each country will protect the most valuable pieces on its board.
Cynthia Crandall, CAIA
VP, Senior Investment Analyst
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2018 Envestnet. All rights reserved.