Three key policy issues achieved greater clarity last week. The U.S. and China reached a “phase one” trade deal. The U.S. will reduce some existing tariffs and not implement a set of planned tariffs in exchange for greater grain exports and some improvement to technology regulation. China is pressing for phase two negotiations to begin soon.
Key Points for the Week
- The U.S. and China reached a phase one trade deal, and phase two negotiations are expected to begin soon.
- Conservatives won a large majority in the U.K., paving the way for Brexit early next year.
- The Federal Reserve left rates unchanged and signaled it will make few rate changes in coming years if the economy continues to grow.
British voters affirmed their support for leaving the European Union. With the landslide victory for Boris Johnson, Brexit looks likely to happen in the early part of next year. The Federal Reserve kept rates steady and signaled rates will stay low for the foreseeable future.
Investors cheered the news. The S&P 500 gained 0.8% higher last week and reached a new record high. The global MSCI ACWI gained 1.3% as global stocks benefited from hopes for a more stable trade environment and greater clarity on Brexit. The Fed’s signal that rates would stay low supported a 0.3% gain in the Bloomberg BarCap Aggregate Bond Index.
This week’s news won’t be as packed as last week’s. U.S. industrial production and an update on personal income will provide some insight into manufacturing and consumer strength.
If the global investment landscape were photographed, parts of the picture would have excellent clarity and others would be so blurry as to be indistinguishable. But, last week, important parts of the picture became clearer. Markets received key information on U.S.-China trade, Brexit, the future path of the Federal Reserve and impeachment. The first three issues have been contributing major uncertainty to markets for years, and the impeachment trial of President Trump has added additional uncertainty. After reviewing the clarity gained in each of the four issues, this article concludes with some thoughts on how to invest when the picture begins to clear.
The U.S. and China reached a “phase one” deal in which the U.S. will not implement tariffs scheduled for last weekend and will gradually reduce the tariffs on some goods from 15% to 7.5% in response to the Chinese making structural reforms in the areas of intellectual property and technology transfer. China will avoid making the more drastic changes sought by the U.S. and resume buying agricultural products in greater quantities. China will also reduce some tariffs. Phase two negotiations will seek to address the more challenging structural issues. This deal sets the tone for less friction in the relationship. Negotiations may make progress if the Chinese are willing to make concessions. The improved stability should provide a steadier policy and reduce the risk of an all-out trade war.
Boris Johnson’s gamble to force elections worked. The large majority and the focus of the campaign give Johnson a mandate to leave the current relationship with the European Union early next year. After being delayed more than three years, Brexit is likely to begin. The next step will be to negotiate trade deals with Europe and the rest of the world. While uncertainty around that step remains, Europe can most likely move on from the Brexit drama.
Federal Reserve Policy
Between the unanimous decision to keep rates unchanged, the press release and Chair Jerome Powell’s press conference, investors gained insight into the Fed’s plans for the next three years. Interest rate hikes will be minimal and slow. If inflation runs above the 2% target for a short period, the Fed is unlikely to respond with a series of rate hikes. More likely it will leave rates lower until there is “persistent and significant inflation.” Because inflation has failed to reach its target consistently, the low-rate environment will likely continue for years to come.
While the most divisive issue for most Americans (not for the British), impeachment is the least impactful on portfolios. But the prospect has created uncertainty, and the path forward now seems relatively clear. The House will vote to impeach the president, largely on party lines. The Senate will take up the trial and, largely on party lines, vote to leave the president in office. While you may be angry, relieved or indifferent, the risk of deadlock in Washington or a major transition before the election now looks unlikely.
When markets drop or uncertainty is high, our final advice is often to stay invested. Uncertainty is a normal part of investing. Bearing the risks of uncertainty is what investors get paid to bear. The path forward on the major issues of 2019 is now clearer. When the investment landscape comes into better focus, the key is not to become overconfident and increase risk. Enjoy a brief moment of clarity. Risks seem to come up in the most surprising places.
Rather than a fun story, this week’s parting thought honors a great public servant. Paul Volcker, the former chair of the Federal Reserve, passed away this week at age 92. Volcker was appointed to head the Fed by President Jimmy Carter during a period of high inflation. Through a series of rate hikes, he was able to tame inflation and help reestablish trust in the U.S. economic team. Volcker was reappointed in 1983 by Ronald Reagan and served until 1987. He also served as an advisor to the Obama administration and helped shaped bank regulation after the financial crisis. His efforts to curb inflation were part of the successful efforts to move the U.S. beyond the economic malaise that stunted growth during the 1970s. Investors owe him a debt of gratitude for his service.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds
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