trade

View from the Chair: Windermere's Market Perspectives (August 2019)

What is happening?

August is traditionally a slow month - as we ease from summer fun back into the routineness of fall. Not this year, at least as it relates to the markets.

In case you’ve tuned out business news for the past week, here is what you’ve missed:

*What goes up is coming back down - last week, the US Federal Reserve lowered the Federal Funds Rate by 25 basis points. Yes, that’s the same benchmark rate that the Fed increased several times last year at a faster than expected rate, leading (in part) to December’s sharp selloff. This recent rate cut was believed to be in response to trade concerns and slowing growth (as lower interest rates should lead to more borrowing and in turn more growth). Markets were tepid in response as they had priced in ongoing rate reductions (which the Fed did not indicate in comments)

*”Tariff Man” strikes - President Trump has given himself this title and he put it to use again as he announced that he would extend tariffs to virtually all remaining Chinese imports not yet subject. Many believe this was in response to China not ramping back up purchase from US ag suppliers/farmers

*China responds in force - Markets woke up Monday (8/5/19) to news that China had devalued its currency (allowing the Yuan to fall below the previously accepted floor of 7 yuan to USD). This sparked an immediate reaction in global markets. China’s central bank said that the currency move was due to economic factors/trade concerns and was not retaliatory. Yet markets clearly viewed it as a sudden increase in trade tension and uncertainty. Why does this devaluation matter so much? As the yuan falls (relative to other currencies, including the USD), it makes Chinese goods cheaper on a relative basis, thereby inherently encouraging other countries to buy from China and discouraging them from buying from other countries, including the US. It was also seen as a extreme tactic, indicating that trade disputes are likely to continue.

*Currency manipulation - President Trump immediately tweeted that China was a currency manipulator and later on Monday, upon reviewing the facts, the US Treasury declared that China was in fact just that. What is required to achieve that label (which is mostly symbolic)? Three factors are considered: (1) country must be known to actively intervene in its currency markets (2) country has a large trade surpius with US and (3) country has a large overall current account surplus. All are true for China

*Not so fast - First thing Tuesday, after the worst day of 2019 for equity markets and treasury yields falling to levels not seen since 2016, China retraced its steps (a bit). China’s Central Bank indicated its desire to keep its currency at a higher level. This statement eased worries that China is intending to use its currency as a weapon in the trade war and markets gained back some of the large decline on Monday

Where does that leave us?

A few truths appear self evident to us:

1) Worthy adversaries - both the US and China are incredibly strong nations with their own unique share of bargaining chips. Much has been debated about who is in a weaker position but it is clear that both are willing to negotiate and stand their ground on behalf of their countries

2) Open negotiations - one has to imagine that before twitter and 24/7 business news, trade negotiations between two world powers such as these would not be dissected and analyzed minute to minute. The media scrutiny and reaction to every back and forth is intense - and should be viewed with extreme caution. A negotiation is just that - a negotiation. It is not (and will not be) an open and shut debate

3) Much at stake - The US has a lot at stake (as does China). But taking an objective view of this, the US does have a trade imbalance with China and has been suffering intellectual property theft for many years. While you may disagree with the tactics (ie: tariffs), the spirit of the issue has recognizable merits

4) Outcome is likely but not on the imminent horizon - It is highly likely that an outcome will be reached. Trump faces a pending election (and while we’d like to think politics don’t play a role, we all know that they do) and China needs to boost its economy and retain growth. A deal will come but we don’t believe it will happen for at least a few months (if not into 2020)

What’s an investor to do?

The time to prepare for a fire is not the day the fire strikes, so to speak. In balanced portfolios, we have been trimming equity weights and building fixed income positions. We’ve also been retaining some cash to add on weakness, such as this, from our “shopping list” of companies as well as skewing equity holdings to larger cap names with a more defensive tilt. And we’ve been ensuring that any liquidity needs are “stored” in cash/fixed income and/or covered by yields.

Best thing you can do is to pause and consider what action you are tempted to take and why. Then give us a call and we can walk thru it together before you do anything. Investors are often most tempted to do the exact wrong thing at the exactly wrong time. Let’s work together to avoid just that.

Invest on - and know you are not in this alone,

Pam

View from the Chair: Windermere's Market Perspectives (June 2018)

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Summer has finally arrived.  There is a seemingly endless list of things to do and places to be – leaving even less time than usual to focus on your money and the markets.  What key items should you be paying attention to?  We suggest keeping your “eye on the TIGER” - Trade, Interest rates, Growth, Earnings, and Recession.

Trade  - What started as a war of words (and tweets),  a “trade tiff” has escalated in recent weeks.  It is becoming more likely that a trade war will ensue on some level (if it hasn’t already).  This past weekend, the latest development was Trump leaving the G7 summit early and refusing to sign the joint communique.  Trump’s actions were largely in response to Justin Trudeau’s (Prime Minister of Canada) comments that Canada would “not be pushed around."  Trump remarked of the G7 that the US is “being taken advantage of by virtually every one of those countries.” 

Attention was quickly turned today to the summit between Trump and Kim Jong Un, a historic meeting that led to an agreement by North Korea to dismantle the country’s nuclear program.  Many details remain to be clarified however, this is a very encouraging sign for global relations.

It’s clear that the the US’ role on the global stage and trade equality remains top of mind for the administration and more is certain to come. 

Interest Rates – Interest rate levels serve as a key component in the pricing of financial assets, and as a result, they deserve your attention.  Interest rates have risen since the beginning of the year (Rate on 10 year US Treasury sits at 2.96% on 6/11/18, up from 2.4% as of 12/31/17).  The US Federal Reserve meets again this week and it is highly anticipated they will again raise rates (the 7th such hike since December 2015).

Perhaps of even more interest is the flattening of the yield curve (when short-term rates rise at a faster rate than long-term rates).  The spread between 2yr and 10yr US treasuries is a much-monitored measure and that spread is declining (rests at 0.43% as of 6/12/18). 

Also worth consideration are interest rates around the globe. Both Europe and Japan continue easy monetary policies (albeit at a slower rate), which will present an interesting dynamic as the United States continues to move the other direction (ie: tighter monetary policy)

Growth – 2017 was the year of “synchronized global growth.”  That phrase was repeated countless times as markets reached record levels.  Has that changed in 2018?  No.  There are 189 economies in the world, and 185 are growing (what are the four?  North Korea, Venezuela, Brunei, and Equatorial Guinea).  The US is no exception, with 4% GDP growth not out of the question.  Economies are advancing – and for now, are growing despite the risks posed from potential trade changes and rising rates.

Earnings -  We are coming out of a record setting earnings season in Q1 2018.  Year over year earnings growth for the S&P 500 was 26.6%.  Much of that gain was driven by the tax law changes;  however the fact remains that earnings are accelerating at incredible rates.  It is expected that we have seen the peak in earnings growth rates – but not yet a peak in absolute earnings levels.  With growing economies and improved cash flow for consumers (due to the tax cut and declining unemployment), companies across virtually every sector are seeing improvements in their earnings and that trend is expected to continue.

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Recession – As primarily equity investors, this is a major area of focus.   We are continually evaluating whether a recession appears imminent as that would present a material headwind for many companies in which we are invested and the markets in general.  How can we predict a recession?  We can’t – but we can observe economic data that has tended to be a very strong predictor of recessions in the past.  The data we use most frequently is the Index of Leading Economic Indicators.  It’s a collection of ten data points utilized to predict downturns in the economy.  We look both at the overall trend line, but also at each of the component parts and their trends.  We are focused on whether the data is getting better/worse, not so much whether its absolute value is good/bad.  Below is a summary of the latest reading of the data and as you can see, we are still in a “better” period

Enjoy your summer and be sure to keep your eye on the TIGER.

Invest on,

Pam