Trade tensions push stocks lower.

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  • U.S./China trade tensions ratcheted higher on Friday offsetting earlier market gains.

  • Manufacturing apparently hurt by trade uncertainty, but consumer data remains solid.

  • China and the U.S. raised tariffs on Friday.

  • Powell speech at Jackson Hole symposium reassured markets.

  • Week Ahead: U.S./China trade developments will likely be the key focus.

U.S./China trade tensions ratcheted higher on Friday offsetting earlier market gains.

The S&P 500 finished lower for the fourth consecutive week after China and the U.S. announced new tariff increases on Friday.  Stocks often trade off if uncertainty increases on Friday, as investors worry about the risk of additional news over the weekend.  The S&P 500 was 1% higher through Thursday, but the gain was more than offset on Friday after the trade developments.  Materials stocks led the broad market decline, though the defensive utilities sector managed a small gain.  Utility stocks are often considered relative safe havens because of the steady demand for power and the relatively higher dividends.  However, it should be observed that the S&P 500 is off only 6% from its recent record high, which doesn’t even qualify as a market “correction” which historically occurs at least once a year on average.

Bonds, another defensive asset, benefited from the trade news, with the Merrill Lynch U.S. Broad Market Index adding another 0.1%.  The broad bond market has returned just over 9% this year due to slower global and U.S. growth, increased trade tensions, lower than expected inflation and interest rate cuts by central banks around the world.  Performance in other markets was more mixed.  Real Estate Investment Trusts (REITS) declined, but gold prices rose.

Manufacturing apparently hurt by trade uncertainty, but consumer data remains solid.

The latest batch of economic data suggested softening in manufacturing activity, a relatively steady housing market and a healthy labor market.  On the manufacturing side, the preliminary or flash Markit manufacturing PMI for August turned very slightly negative and their services index slowed more than expected though it remained in positive territory.  Trade uncertainty and slower global growth seem to be the major sources of weakness.  However, domestically, the index of leading indicators rose a healthy 0.5%, while the decline in mortgage rates boosted existing home sales a bit more than expected in July, though new home sales slowed.  The decline in weekly initial jobless claims showed a healthy labor market and a limited desire by companies to cut back on employment despite slower manufacturing.  Third quarter GDP is on track to rise about 2% based on available data.

China and the U.S. raised tariffs on Friday.

Trade tensions ratcheted up another notch Friday after China announced it will impose new tariffs on $75 billion of U.S. goods in addition to restarting levies on U.S. cars.  Cellphones, semiconductors and machinery are the largest categories of exports to China.  President Trump responded by raising existing duties on $250 billion in Chinese products to 30% from 25% on October 1.  In addition, the new tariffs on $300 billion announced at the beginning of the month will now be 15% instead of 10% when they go into effect September 1.  Evidence suggests that this tit-for-tat trade policy has helped dampen global trade and economic activity.  The U.S., however, does not export as much as other developed nations as a percent of the total economy so is somewhat less affected by the trade disputes.

Last year, at the beginning of the trade negotiations, we believed it was in both parties’ best interest to reach an agreement quickly.  WE still do.  However, as time progressed, we noticed that the tenor of the comments, particularly from China, became increasingly political and nationalistic.  Via Nova is less confident that an agreement with China will be reached over the near term and that trade tensions will remain a cloud over the global economy and the equities markets.

Powell speech at Jackson Hole symposium reassured markets.

Federal Reserve Chairman Jay Powell delivered a reassuring message to the markets in his keynote speech at the annual Fed conference at Jackson Hole in Wyoming.  The conference is not a policy setting meeting, so no action on interest rates was taken or expected.  Powell did, however, reiterate that the Fed will “act as appropriate to sustain the expansion.” 

We believe the speech is very informative, because it gives us insight as to how the Fed sees the world and how they are likely to act in the current atypical environment of simultaneous low unemployment, low inflation, and low interest rates.  Powell noted that, since the last FOMC meeting where the Fed cut interest rate by one-quarter percent, there have been tariff increases, further evidence of global economic slowing, particularly in Germany and China, increased risks of a hard Brexit by the UK from the EU, rising tensions in Hong Kong, and a dissolution of the Italian government.  These are relatively uncharted waters for monetary policy makers.  “There are, however, no recent precedents to guide any policy response to the current situation.  Moreover, while monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rulebook for international trade,” he said. 

Based on these and other comments, we believe the Federal Reserve will continue cutting interest rates gradually over the coming months, despite differences of opinion among the voting members of the FOMC.  These anticipated actions are not likely to fully offset the challenges currently facing the global economy, but they can act as a partial backstop.  Lower interest rates will help reduce the cost of mortgage, home equity, credit card and automobile loans.  Lower rates may also help address the rise in the value of the dollar by bringing U.S. rates closer in line with other international rates.  A weaker dollar would help make exporters more competitive.  We’ll see.

Week Ahead: U.S./China trade developments will likely be the key focus.

Investors will be watching for signs that U.S./China trade negotiations are back on track.Throughout this process, we have seen several instances of abrupt and aggressive announcements one day be gradually walked back in the following days.Face-to-face talks would be a positive sign that both sides are tuning down recent rhetoric.On the economic front, we will get more updates on manufacturing and the consumer from durable goods orders and personal income respectively.A survey of pending home sales could give some perspective on the impact on housing from the recent decline in mortgage rates.