The Trade War Escalates

The stock market has been correcting the past week as investors fear the economic ripple effects of escalating tariffs between the US and China. What started back in March of 2018 as tariffs on imports of Chinese steel and aluminum has escalated to tariffs on hundreds of billions of dollars on thousands of products by both the US and China. Investors were led to believe that trade discussions were constructive until last week when the US announced that trade discussions had hit an impasse. In response:

  • The US will be raising tariff rates from 10% to 25% on $200 billion of goods and an additional $325 billion would be tariffed at 25%
  • China retaliated by announcing higher tariffs on $60 billion worth of US imports of more than 5,000 items

Tariffs are essentially taxes designed to increase the price of imported goods. The purpose is to make domestic goods cheaper and imported goods more expensive. It’s a form of industry protectionism implemented by the tariffing country. The problem is:

  • Tariffs are a barrier to global trade
  • Other countries tend to retaliate to US tariffs with tariffs of their own
  • Certain industries are hit much harder than others
  • Most often tariffs end up being an additional tax on consumers
  • The sum effect of global tariffs is downward pressure on global growth and higher prices to consumers

It’s because of the potential for lower global growth that investors become concerned when trade tensions escalate. But before we panic, let’s examine a few facts. According to First Trust’s Chief Economist:

  • In 2018 the US exported $180 billion of goods to China, this is roughly 0.9% of our GDP*
  • In 2018 China exported $559 billion of goods to the US, this is roughly 4.6% of its GDP*

Obviously China has more at stake here than the US does in a trade war between the two countries. The US is also concerned about increasing trade deficits with China and the fact that China is widely believed to be involved in theft of US intellectual property. President Trump hopes these tariffs will force China to craft a long term trade agreement with the US that is fair to both.

The escalation of the trade tariffs and a strong US market in 2019 has caused investors to hit the pause button and take some profits. For now it looks like we won’t get much trade resolution until China President Xi Jinping and Donald Trump meet at the G-20 Summit next month. Below is an illustration of the trade tariff timeline between the US and China:

For the time being the markets could be more volatile than usual. In these turbulent times a good example of an ETF that can protect investors from volatility is Invesco’s S&P 500 Low Volatility ETF. The Gradient Tactical Rotation (GTR) strategy rotated to this sub sector in November of 2018 and has been invested there since. This has proven to be an opportunistic rotation as the US low volatility sub sector of the global market has performed well in the last 6 months.


To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.


Posted on May 14, 2019 Read More

U.S. Stocks: New All-Time Highs

The fourth quarter pullback in stocks can officially be declared a correction as the 2019 version of this bull market took major U.S. stock indices to new all-time highs.  The Federal Reserve’s pivot to a dovish monetary stance in early January has paved the way for stocks and bonds to prosper.  The macro tailwinds from the economy and the Fed certainly help, but it is the individual company results that ultimately drive price.  As you can see from the market returns below, everything was positive for the month with the exception of commodities.  U.S. stocks continue to lead all global returns.

The first month of a new quarter means the market turns its attention to another round of corporate earnings releases.  This quarter’s earnings are especially significant as the market tries to judge the magnitude of the expected slowdown in earnings growth.  Wall Street is paying special attention to the company’s forward earnings guidance to better assess the full year 2019.

Companies reporting sub-par numbers are being punished by the market, while the winners are trading at all-time high prices. This month’s casualties included 3M, Intel, UPS, Alphabet and Exxon.  On the positive side, strong reports from Walt Disney, Microsoft, Facebook, Apple and JP Morgan fueled gains.   The early read on earnings is 78% of the S&P 500 companies have exceeded analyst expectations.  An active IPO (Initial Public Offering) market has also provided a bullish tone to equities and 2019 is expected to be a big year for IPOs.  April saw Lyft, Zoom Video, PagerDuty and Pinterest coming to the public market for the first time.  Other large private companies including Uber are expected to issue public stock this year.

On the economic front, first quarter GDP reported a 3.2% growth rate, well above the 2.4% expected rate.  The strong consumer is keeping us on solid footing as retail sales gained 1.6% in March, its largest gain since September 2017.  The March employment number was back on track as 196,000 net new jobs were created.  Monthly job growth averaged a respectable 180,000 jobs in the first quarter. Inflation, as measured by the Consumer Price Index, rose 0.4% in March.  This was the largest bump in 14 months mostly driven by higher gas prices.  The annual inflation rate at 1.9% is still running below the Federal Reserve’s 2-2.5% inflation target.

The bond market has been rock solid so far this year with the Fed calling a timeout to future rate increases.  The Fed’s move to a dovish monetary policy coupled with continued low inflation, declining global interest rates, a strong dollar and stable economic growth has kept credit spreads tight and interest rates stable.  The yield curve, while very flat by historical standards, is still hanging on to its positive slope.  The 2-Year Treasury note yield finished the month exactly where it started at 2.27%.  Meanwhile, the 30-Year Treasury bond added 12 basis points to yield 2.93%.  Most of the yield curve now has interest rates lower than the very short-term fed funds rate currently set by the Fed at 2.50%.  The benchmark 10-Year U.S. Treasury note again traded in a tight range hovering around 2.5%.  In April, the 10-Year rose 10 basis points to end the month yielding 2.41%. The slight uptick in rates this month should not be a surprise after the strong rally in March.

The question all of us ask is, where do we go from here?  Attention needs to be paid to corporate profits, future guidance and the path of the U.S. and global economies.  Investors are assessing the strength of the economy to determine if it is softening or strengthening relative to expectations.  At this moment in time, we believe the stock and bonds markets are priced appropriately.  Future catalysts, be they positive or negative will drive prices accordingly.  A trade deal with China, corporate earnings, Brexit, employment, inflation, the Federal Reserve and investor sentiment are all important.  If you are a long-term investor with a solid financial plan these concerns or opportunities become less important.  If you tend to be more emotional regarding market movements, these factors can be a concern.  An intra year 10% correction is very likely, so do not be surprised if there is one before the end of this year.  We are still positive on the long-term outlook and would encourage investors to also take a long-term approach.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.

Posted on May 6, 2019 Read More

Recent Underperformance In Health Care

Thus far, 2019 has been a very strong year for stocks.  Year-to-date, the S&P 500 is up over 15% and international stocks are also up more than 10%.  While this has been a strong market in general, and many of the sectors have participated in the upside, the Health Care sector performance has lagged significantly.  Below is a chart that shows S&P 500 performance by sector year-to-date. *

While Health Care has lagged all year, the weakness in the sector’s stocks has accelerated in the last few weeks.  The below chart, from Bespoke Investment Group, show that Health Care has diverged significantly from nearly all other sectors in the market.  Per Bespoke research, this type of occurrence is rare.  Since the early 1980’s, there have been only 10 other periods where one sector has traded at oversold conditions while all other sectors were overbought.

The primary concern in the Health Care sector has been political rather than fundamental.  Currently, there are a few widely-discussed initiatives that could have negative implications for Health Care companies.  Those include:

  • Medicare For All – a proposal that would cause significant changes to our current health insurance system
  • Drug pricing regulation – it has been suggested that this is one of the few bi-partisan issues which could see legislation that could be passed

Neither of the above initiatives have definitive policy or any clear mandate as of now but Health Care stocks have reacted, nonetheless.  Whether these initiatives ever see full-fledged enactment, and what the ramifications will be for Health Care companies, will have a large influence on their future performance.


To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.

Posted on April 29, 2019 Read More
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