Since peaking late in the third quarter of 2018, U.S. equities have experienced large swings in performance. Following the worst December performance since 1931, the S&P 500 staged a dramatic rebound logging its best quarterly return since the first quarter of 1998. Equities continued their march higher culminating with the S&P 500 reaching an all-time closing high of 3,025.86 on Friday, July 26th. The year-to-date rally is attributable to a multitude of factors, however, a dovish pivot by the Fed and optimism around U.S.-China trade relations were key macro drivers facilitating the rebound.

However, fortunes quickly changed last week as the S&P 500 logged its worst weekly performance so far this year with a 3.1% drop and the sell-off continued into Monday with a steep one-day drop of 3%. Recent market volatility centers around changing expectations with respect to the economic outlook, market participants reconciling a smaller rate cut than was priced in, and an escalation in the trade war with China. U.S. officials had hinted throughout the year that a deal was close ­— and progress was being made — however that trade deal optimism is now in doubt. An additional 10% tariff on $300 billion worth of Chinese goods was announced last week and is set to take effect on September 1st. China retaliated by telling its state-owned companies to suspend U.S. agricultural imports and allowing its currency to fall to decade lows against the U.S. dollar.

Volatility is likely to stay elevated over the near-term as the economic and trade outlooks remain uncertain. Historically, August is a volatile month and on average the third quarter produces muted returns. It is worth noting that the S&P 500 still has a double-digit year-to-date return and is trading nearly 5% below all-time highs; whether or not the index remains in positive territory for the duration of 2019 will no doubt depend at least partly on how the U.S.-China trade issues play out over the next 5 months.

Print PDF > August Off to a Difficult Start

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

On May 10th, the United States increased tariffs from 10% to 25% on $200 billion of Chinese imports after trade talks broke down. The increase was initially planned for January 1, 2019, but the U.S. delayed the tariffs in order to see if a resolution could be reached by May 1st. China retaliated on May 13th with an increase in tariffs on $60 billion on American goods, effective June 1st.

Since the announcement, U.S. and Chinese equity markets have been down 0.9% and 6.1% through May 17th. In particular, there are a number of companies and industries caught in trade crosshairs:

• Apple: China accounts for almost 20% of Apple’s revenue and hundreds of its suppliers are located in China. Concurrently, Chinese consumers have been moving away from more expensive iPhones towards cheaper Chinese brands like Huawei.
• Semiconductors: Intellectual property disputes were key to the breakdown in trade negotiations. Many semiconductors are made in China and are used in mobile devices. An increase in tariffs could raise prices for consumers, which may lead to higher inventories and lower investment in innovation.
• Materials: China owns 90% of rare earth supplies, which are used in advanced technologies. These materials may be subject to future tariffs.

Fortunately, the United States has taken some steps to lessen the blow of tariffs. First, the Trump administration delayed making a final decision on whether to impose tariffs on auto imports from the European Union and Japan. Second, the administration reached a deal with Canada and Mexico to end U.S. and retaliatory tariffs on steel and aluminum. This removes a major roadblock in the possible passage of the USMCA trade agreement, which would replace NAFTA, by Congress. However, our trade with China is greater than our trade with Canada or Mexico.

Recently, consumer confidence hit a 15-year high, but the survey was taken before the May 8th trade announcement. While the Street is crossing its fingers that a deal can be reached by the G20 summit in late June, we are more concerned with how a prolonged dispute can affect business investment and eventually, consumer confidence.

Print PDF > Upping the Trade Ante: The U.S. Increases Tariffs on China

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

This week’s chart looks at Morningstar fund flow data among the broad category groups of U.S. equity, international equity, taxable bond, and municipal bond. Since January 2018, U.S. equity funds saw cumulative net outflows totaling $123 billion, while international equities had positive cumulative inflows of $30 billion, taxable bonds had positive cumulative inflows of $97 billion, and municipal bonds had positive cumulative inflows of $32 billion. Negative fund flows within U.S. equities continue to persist in 2019 despite strong year-to-date gains.

The trend of U.S. equity outflows over the span of this bull market is nothing new but it is surprising to see fund outflows persist in the face of such a strong recovery off the December 2018 lows. As an example, the S&P 500 recently hit a record closing high of 2,945.83 on April 30^th, surpassing the previous record closing high of 2,930.75 logged on September 20^th, 2018. With the bull market turning ten years old on March 9^th, a non-euphoric sentiment among investors may be a factor keeping this historically long bull market going.

What is driving this recent rally? In the past few months, investors have reacted to a significant reversal in monetary policy, better than expected first quarter earnings, a strong first quarter GDP, as well as continued increases in corporate stock buybacks. However, caution observed in fund flows may prove warranted with such items as a technical yield curve inversion, weakening profit margins, U.S.-China trade deal, Brexit, and upcoming 2020 elections weighing on investors’ minds.

Print PDF > U.S. Equities Rally as Outflows Persist

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.