It was a very volatile week in the markets with stocks ending lower, though the losses were modest given the volatility. For the week, the Dow was lower by 0.7%, the S&P was off 1.4%, and the Nasdaq fell 2.1%. Bonds prices came off their highest level in more than year as their yields rose (prices fall when yields rise). Gold moved higher again, up 0.7%. Oil was lower on the week, off 4.7% to close at $61.95 per barrel. The international Brent fell to $66.93.
Zooming out, here’s a look at the market over the past year:
“Volatile” was the word of the week as stocks saw large moves every day. In fact, the Dow moved over 200 points every day this week.
The culprits for the volatility remain the same – trade worries and a tech-stock selloff.
We’ll start with the selloff in technology stocks, which pressured the markets at the open Monday.
There wasn’t one specific reason for the selling. Instead, it seems more like investors were looking to take risk off the table. Since tech stocks have outperformed the market by a wide margin, it made sense to take gains here first and reduce portfolio allocation to this sector. The tech sector accounts for 20% of the broader market – the most of any sector – so the selling here dragged the broader indexes lower.
Fun stat: since Monday was also the first day of the second quarter, Monday’s large selloff resulted in the worst start for the second quarter since 1929.
The culprits for the volatility remain the same – trade worries and a tech-stock selloff.
We’ll start with the selloff in technology stocks, which pressured the markets at the open Monday.
There wasn’t one specific reason for the selling. Instead, it seems more like investors were looking to take risk off the table. Since tech stocks have outperformed the market by a wide margin, it made sense to take gains here first and reduce portfolio allocation to this sector. The tech sector accounts for 20% of the broader market – the most of any sector – so the selling here dragged the broader indexes lower.
Fun stat: since Monday was also the first day of the second quarter, Monday’s large selloff resulted in the worst start for the second quarter since 1929.
Grabbing headlines for much of the week was the ongoing trade tensions, which ratcheted up a notch this week.
On Tuesday, President Trump announced a 25% tariff on $50 billion worth of Chinese imports as a response to their unfair trade practices. China then swiftly responded with a 25% tariff on $50 billion worth of US imports. Keep in mind that China already has a 25% tariff on many of our items, so this will be an additional 25% levy.
The Chinese tariffs were unique in that they targeted items from regions of the country that voted from President Trump. Chinese media (which is controlled by the government) were quick to point out this fact:
On Tuesday, President Trump announced a 25% tariff on $50 billion worth of Chinese imports as a response to their unfair trade practices. China then swiftly responded with a 25% tariff on $50 billion worth of US imports. Keep in mind that China already has a 25% tariff on many of our items, so this will be an additional 25% levy.
The Chinese tariffs were unique in that they targeted items from regions of the country that voted from President Trump. Chinese media (which is controlled by the government) were quick to point out this fact:
Soybeans are a popular export to China and bore the brunt of the tariffs. As we can see in the image below, soybeans are mostly found in the heartlands of the country, which is the heart of “Trump Country.”
The Chinese retaliation surprised the markets and sent stocks sharply lower. However, stocks later rose as investors realized that these announcements were likely opening gambits in a negotiation. Talks will continue for months before any tariffs become official, and then it could be years before they are actually implemented.
Unfortunately that sense of relief didn’t last long when President Trump responded with new tariffs on an additional $100 billion in Chinese goods. This may be yet another salvo in the negotiation, but to investors it’s starting to look like a trade war. Markets again sold off as a result.
The trade imbalance with China is a serious issue that does need to be addressed. They have never played by the rules and years of attempts to force them to do so have yielded little. Perhaps this strategy will work in the long run, but right now it looks a little messy.
Switching gears to economic data this week, where the results were largely negative. The strength of the manufacturing and service sectors ticked slightly lower last month, though they remain at a high level. Also, the economy only added 103,000 jobs in March, a disappointing number that came in much lower than expected.
Unfortunately that sense of relief didn’t last long when President Trump responded with new tariffs on an additional $100 billion in Chinese goods. This may be yet another salvo in the negotiation, but to investors it’s starting to look like a trade war. Markets again sold off as a result.
The trade imbalance with China is a serious issue that does need to be addressed. They have never played by the rules and years of attempts to force them to do so have yielded little. Perhaps this strategy will work in the long run, but right now it looks a little messy.
Switching gears to economic data this week, where the results were largely negative. The strength of the manufacturing and service sectors ticked slightly lower last month, though they remain at a high level. Also, the economy only added 103,000 jobs in March, a disappointing number that came in much lower than expected.
Amidst all this negative news, the one bright spot is corporate earnings. Results from the first quarter will begin rolling in next week and the bar is set high. Data-provider Factset estimates a 17% growth in earnings, which will be the best quarter since 2011.
Lastly, Masters week would not be complete without touching on the subject. This year, a glimpse into the life of an Augusta National member, from Golf Magazine:
Lastly, Masters week would not be complete without touching on the subject. This year, a glimpse into the life of an Augusta National member, from Golf Magazine:
Next Week
The trade war saga is likely to continue next week, so it may again be a bumpy one. There will be some economic data we’ll be watching, including inflation reports and info on employment. Corporate earnings will also begin rolling in, so it will probably be nice to hear some company-specific news instead of these macro stories that have dominated headlines.
Investment Strategy
The selloff in stocks over the past month has put them at an oversold (cheap) level from a short term perspective. We did a little buying this week as a result, but now look a little foolish as stocks sold off to close out the week. Markets are likely to remain volatile and it’s anyone’s guess where the market will go in the short run, but some buying on stability might not hurt with a longer term perspective. Remember, buy when others are fearful.
The trade war saga is likely to continue next week, so it may again be a bumpy one. There will be some economic data we’ll be watching, including inflation reports and info on employment. Corporate earnings will also begin rolling in, so it will probably be nice to hear some company-specific news instead of these macro stories that have dominated headlines.
Investment Strategy
The selloff in stocks over the past month has put them at an oversold (cheap) level from a short term perspective. We did a little buying this week as a result, but now look a little foolish as stocks sold off to close out the week. Markets are likely to remain volatile and it’s anyone’s guess where the market will go in the short run, but some buying on stability might not hurt with a longer term perspective. Remember, buy when others are fearful.
The longer term is a little difficult to predict, too, though. Fundamentals remain very good – pro-business policies out of Washington provide a solid tailwind. However, rising interest rates (which are like Kryptonite to stocks) could tug markets lower. It’s tough to predict where the market will go from here.
Bonds are also volatile, but their prices have remained in an uptrend for the last several months. Yields may break out and move higher (so prices move lower), but we think they don’t have much room to run here.
As for the rest of the portfolio, bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. Floating-rate bonds will do well if interest rates do rise.
Some municipal bonds look attractive for the right client, too. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. We keep a longer term focus with these investments.
Gold is another good hedge for the portfolio. It is only a hedge at this point – rising on geopolitical issues as a flight to safety.
Finally, in international stocks, we prefer developed markets to emerging ones at this time.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
Bonds are also volatile, but their prices have remained in an uptrend for the last several months. Yields may break out and move higher (so prices move lower), but we think they don’t have much room to run here.
As for the rest of the portfolio, bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. Floating-rate bonds will do well if interest rates do rise.
Some municipal bonds look attractive for the right client, too. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. We keep a longer term focus with these investments.
Gold is another good hedge for the portfolio. It is only a hedge at this point – rising on geopolitical issues as a flight to safety.
Finally, in international stocks, we prefer developed markets to emerging ones at this time.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
