The second quarter has gotten under way with equity investors decidely playing the defensive. As of Monday morning, selling pressure across the board is being observed in reaction to retaliatory tariffs from China and the recent decline is continuing in tech shares that have led the markets over the last year.
In a direct response to the recent U.S. import tariffs on steel and aluminum, China has increased import duties on a $3 billion list of U.S. pork, apples, and other products. It is our opinion that the market’s concern is not necessarily focused on the nominal size of the newly announced tariffs, but rather that the likelihood of trade tensions worsening and tit-for-tat actions from both countries have increased. In relative and economic terms, we believe this protectionist move from the United States’ largest trading partner is not very sizable when compared to the $150 billion of U.S. goods the country imports each year. We would argue that in the context of a trade war these actions are categorical warning shots and not full-on artillery barages designed to inflict real harm. With the Trump Adminstration clearly favoring bilateral trade negotiations over a multilateral approach, as was observed with the United States’ exit from the Trans-Pacific Partnership (TPP), we believe the tariffs on both sides are intended to function as negotiating tactics, but investors will continue to watch closely to see which side might blink first. Please read the below report from the Wells Fargo Investment Institute for further commentary on this subject.
The technology sector saw a wide sell-off Monday. Data security concerns surrounding social media platforms continue to pressure the sector that as the end of Q1 experienced a 1year return of over 27%, well above the S&P500’s total return of almost 14% for the same time period.
This kind of volatility is not uncommon for the type of late-cycle economic expansion we believe the U.S. is currently experiencing. We talk often, perhaps ad nauseum, about the importance of diversification in accomplishing long-term financial goals and these recent market developments point yet again to that value. While we openly acknowledge that sharp, short-term gyrations are always difficult to sit through, it’s important to note that the world’s population continues to grow, companies continue to operate more efficiently, and global economic growth continues to be very much in an uptrend. Countries squabling and positioning around their competive trade terms in nothing new, and we believe that the powers-that-be on each side of the Pacific know that both have too much skin in the game to engage in an all-out, no holds barred, trade war. Adam Smith, widely known as the father of modern economics, once said that “Every man lives by exchanging” – he may have been on to something…
Rising Tariffs--Trade War or Negotiation Technique? by Craig Holke
The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the judgement of the author as of the date of the report and are subject to change without notice. Statistical information has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
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