Investors appeared as stunned as a bird flying into a plate glass window on Monday, as the China tariff tussle escalated. However, stocks recovered from the initial shock, clawing back much of the declines as the week progressed. Without a trade deal in place with China, investors are left in limbo pondering whether the spat will lead to an all-out trade war with detrimental economic implications. Investors hate uncertainty. We expect a deal to come before it gets to that point, but until then, the stock market will be forced to price in some probability of that worst-case scenario.
Headlines this Week
- The U.S. increased tariffs on $250 billion Chinese imports from 10% to 25%. In retaliation, China raised its tariffs on $60 billion of U.S. imports to China. Investors fear an impact on global growth, which brought volatility to the equity markets, with a particularly ugly Monday. However, both China and the U.S. reiterated that they are still working on a deal, helping to boost markets the remainder of the week.
- The Chinese economy is a meaningful contributor to global growth. A slowdown in China can spill over to emerging and developed markets. In response, investors shifted capital away from international equity markets. A trade deal could take time or happen overnight. Investors should focus on the long term.
- On a positive note, Mexico and Canada agreed on a deal that will lift tariffs on steel and aluminum which were in place as a North American Free Trade Agreement (NAFTA) bargaining tool.
- Also, while the White House has not officially announced their decision regarding tariffs on European cars and car parts, sources from the White House have told the news networks that the U.S. administration is considering delaying their decision by six months. This delay will hopefully buy enough time for both sides to find middle ground on trade.
- In response to trade-related headwinds, U.S. Treasuries found its renewed role of safe-haven. Interest rates have gone down, and the yield curve has flattened, with the inversion on the short end again. In related news, China is selling a portion of its U.S. Treasury stockpile, the $20.5 Billion they unloaded was the largest amount in 2 ½ years, but the market was able to soak that up.
Spotlight: Do you have the personality for stocks?
So, you have amassed enough savings to justify owning individual stocks in your diversified portfolio. Should you? After all, with stocks, you own a piece of something tangible… a public company. Right? Not so fast. The decision to own individual stocks is as much about your investing personality as it is about the size of your investment account.
To be clear, stocks are not better than exchange-traded funds (ETFs) or mutual funds; they are just a different mechanism to achieve your ideal risk exposure. We can build a portfolio with stocks or funds that have similar expected risk and return characteristics. A far more impactful decision is how much of your portfolio is in risky assets (think stocks or high yield bonds), safer assets (like high quality fixed income instruments), and complementary assets (gold, real estate, etc.). These are the big dials of asset allocation which drive long-term returns. Whether the stocks are individual or in a fund is very much a secondary decision.
But there is a difference between stocks and funds in that stocks will, at times, produce big price swings. It is not unusual to see a good quality stock lose 10% or more of its value in a single day. So, to own individual stocks you need to be comfortable with these normal gyrations. If big declines on certain stock holdings will keep you up at night questioning each investment decision, you are better off with funds. If, however, you shrug off a 10% decline in one stock as a future opportunity, and like the idea of seeing the company names you own in your portfolio, then you may have the investing personality to stomach individual stocks.
The Week Ahead
FED up with volatility?
- Federal Reserve meeting minutes will be paired with a heavy speech calendar from central bank officials including the Chairman himself.
- Earnings slow down to crawl with just retailer TJX Companies (TJX) and medical equipment maker Medtronic PLC (MDT) on the calendar.
- Durable goods report, regional manufacturing reports, and some housing data are of interest on the economic front.
Stock Highlights from Max
Paying a Deere Price for No Deal
With interest rates moving lower and the yield curve flattening, it is no surprise that the REIT and Utility sectors took the lead this week. On the other hand, Financials felt the sting of these same forces, but somehow managed to finish slightly better than the industrial sector, which could not duck its way from the stalemate with China, especially due to one company …
- Deere & Co. (DE) reported a weak quarter, missing expectations on revenue and earnings. The agriculture machine giant cut its guidance. The weak capital position of U.S. farmers was the culprit. The current tariff developments come on top of a delayed planting season for U.S. farmers. On the bright side, the company did increase sales by 6% year-over-year to $11.3 Billion. Also overlooked is the 11% jump in sales from the Construction & Forestry unit.
- Another earnings-related story comes from Cisco Systems, Inc. (CSCO), which beat by a penny on earnings. The penny beat was not what investors were excited about; it was the double-digit operating income growth. Revenue grew in all sectors, including a 21% jump in the Security unit. Lastly, the company increased revenue guidance, as well. CSCO was a bright note from Tech as the rest of the sector was held down by the news of a ban of Chinese telecom company Huawei. Chipmakers and semiconductor equipment makers were all dragged down as fear that their sales to Huawei will suffer.
- Walt Disney Co. (DIS) also made news this week, as it managed to convince Comcast Corp. (CMCSA) to sell its stake in Hulu to them in five years. Disney will pay Comcast for their content for now. The current value of this stake is $27.5 Billion.
|Indices & Price Returns||Week (%)||Year (%)|
|S&P 400 (Mid Cap)||-2.3||13.6|
|Russell 2000 (Small Cap)||-2.4||13.9|
|MSCI EAFE (Developed International)||0.2||8.6|
|MSCI Emerging Markets||-2.2||4.7|
|S&P GSCI (Commodities)||2.5||18.9|
|MSCI U.S. REIT Index||1.1||16.5|
|Barclays Int Govt Credit||0.3||2.0|
|Barclays US TIPS||0.2||3.7|
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