Escalating trade tensions push stocks lower.

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  • A wild ride for stocks benefited bonds.

  • Week Ahead: Attention focused on U.S./China trade developments.Also, plenty of economic reports.

A wild ride for stocks benefited bonds.

China’s decision to devalue its currency in response to the threat of a 10% U.S. tariff on the remaining $300 billion of China imports not already hit by tariffs sent the stock market on a wild ride in the latest week.  The S&P 500 fell nearly 6½% below its record high in late July at one point before recovering much of the losses.  Still, the large cap index finished ½% lower for the week, and small cap, international and emerging market equities fell over 1%. 

The turmoil pushed interest rates sharply lower, lifting the Merrill Lynch Broad Bond Market Index over ½%.  The yield on the 10-year Treasury note closed below 1¾% compared to nearly 3% yield a year ago.  The decline in bond yields also pushed down home mortgage rates to a 3-year low of 3½%, which spurred a surge on home refinance activity.   

Heightened international tensions on multiple fronts, including Hong Kong, Kashmir, Iran and Russia pushed gold prices up by over 3½%.  On the downside, forecasts of slowing global growth sent oil prices over 5% lower hurting energy stocks.

Recent events suggest the trade war between the U.S. and China will likely become protracted and disrupt supply chains and slow global growth.  We do not believe either side will “win” this trade war, but both sides are trying hard not to blink first.  Failure to resolve the trade dispute will likely heighten stock and bond market volatility in the near term.  However, Via Nova does not believe this trade war will cause a recession here in the U.S., and we believe stocks will continue trending higher despite the recent increase in volatility.  We also expect the Federal Reserve to reduce interest rates further in the coming months helping to reduce downside risks to the economy.  However, we will likely see a shift in the economic landscape.  For example, several large companies have begun shifting production away from China, and Mexico has moved ahead of China to become our largest source of imports in recent months.

Week Ahead: Attention focused on U.S./China trade developments.  Also, plenty of economic reports.

With second quarter earnings season winding down, investor attention will likely focus mostly on trade-related developments, which could keep equity markets volatile.The economic calendar will be more active with updates on consumer spending, housing, small business sentiment and manufacturing.