Market update: When it rains, it pours

By Anthony Saglimbene, Ameriprise Global Market Strategist

As of June 18, 2019

Looking back

  • Economic activity slowed across the globe, but United States economic growth remained stable
  • First quarter S&P 500 profit growth declined for the first time since 2016
  • U.S./China trade negotiations stalled, while tensions with Mexico escalated

Up ahead

  • The G20 summit offers an opportunity for the U.S. and China to restart trade talks
  • Markets could be range-bound this summer and may be sensitive to trade-related headlines        
  • Strong companies with predictable earnings growth and long-term competitive advantages may offer the best potential for favorable returns

Data Source: FactSet

The punches keep coming   

Global growth is slowing, trade frictions are rising, and both have the potential to eat away at what is already expected to be modest corporate-profit growth this year. Stalled U.S./China trade talks are now raising questions about growth prospects for the global economy over the coming quarters.

Global central banks, the International Monetary Fund (IMF), World Bank and Organization for Economic Co-operation and Development (OECD) have cut their economic growth forecasts for 2019. All cited trade issues, lower inflation, and escalating geopolitical tensions as reasons for their less-than-rosy outlooks. In fact, the Federal Reserve and European Central Bank both recently hinted they stand ready to ease monetary policy (by taking steps such as cutting interest rates) if economic conditions warrant, which could help support asset prices.

Tensions flare between the U.S. and China

The rhetoric has meaningfully increased over the last few weeks between the two countries, causing both sides to become entrenched in established defensive positions, effectively putting a trade deal farther off in the distance. Unfortunately, if this turn of events leads to more tariffs and sanctions, we may need to adjust our near-term views on the market and economy lower. The G20 summit later this month in Japan may offer an opportunity for each president to work toward resolving trade tensions.

The White House expands its tariff threats

Additionally, President Trump recently used the threat of tariffs on Mexican imports to force the country’s hand on immigration policy. However, before a series of biting tariffs could begin, which would have increased each month automatically until they reached 25% by October 1st, Mexico agreed to take stronger measures to stem the tide of illegal immigration on its northern border.

The economic impact could have been meaningful. In 2018, the United States imported $347 billion worth of goods from Mexico, an increase of +10.3% over the prior year. This accounted for nearly 14 percent of overall U.S. imports, according to the U.S. Trade Representative. Although the business effects of increased tariffs on imports from Mexico could have been most pronounced in the auto and agricultural industries, they may have had adverse implications across a wide swath of the economy. Although the White House indefinitely suspended the tariffs on Mexican imports, its recent strategy is likely to leave investors wondering who’s next?

Tech companies draw increased scrutiny

Lastly, technology stocks have come under considerable pressure over recent weeks. Along with the challenges created by trade frictions and slowing growth, the U.S. government is preparing sweeping reviews of several technology giants. In our view, the moves show the White House and Congress plan to take a tougher stance on tech, particularly as privacy concerns have grown and tech’s hold on troves of personal information have largely gone unchecked.

Although it’s too early to draw any definitive conclusions about how to position against these growing regulatory threats, investors should be aware that sentiment appears to be shifting on the technology sector. The U.S. government is putting large tech giants squarely in its sights – and not in a favorable way. Technology stocks currently represent more than 20 percent of the S&P 500 Index, so any action potentially detracting from their growth prospects could have a material influence on the overall stock market, in our view.       

A time for investor discipline and a balanced outlook      

An inverted yield curve (short-term bonds paying higher yields than long-term bonds), growing recession fears, and mounting uncertainty in the United Kingdom regarding the next steps for Brexit are also weighing on investor sentiment. Yet for all the justified reasons for worry, the S&P 500 is only moderately off its all-time high.  

Importantly, when it comes to trade, which presents the most significant risk currently, the potential market impact is less than clear. If trade tensions subside, stock prices can move higher from here. If the trade dispute worsens, stock prices are most likely headed south. Since it’s impossible to predict what a few world leaders are going to do next, the best approach for investors is to stay diversified, mitigate risk where possible, and lean on quality investments that will remain a good fit in your portfolio over the longer-term.


Data source: Morningstar Direct 

 

As of June 18, 2019