Can the U.S. and China find common ground?

By Anthony Saglimbene, Ameriprise Global Market Strategist

As of Sept. 17, 2019

 

Looking back

  • The S&P 500 Index fell 1.6% in August, its worst month since May.
  • Energy, Financials and Materials led markets lower.
  • Investors looked for shelter in bonds and defensive equity sectors.

 

Up ahead

  • Historically, stock prices tend to be volatile in September, followed by stronger returns heading into the final months of the year.
  • The United States and China will resume trade talks.
  • Investors should be more cautious, given market circumstances.

Data Source: FactSet

Are we really back to where we started?

Stock prices headed south in August — like they did in May — when trade tensions took an unexpected turn for the worse. However, looking at trading patterns throughout the last full month of summer, market gyrations were just a series of back-and-forth movements. The S&P 500 experienced 10 rallies of +1.0% or more, and nine declines of 1.0% or more. Although U.S. equities finished August on a strong note, they are hardly out of the woods if trade tensions rise and economic data show additional signs of weakening.

As we have seen many times this year, when market circumstances suddenly shift, asset prices can also rapidly change direction. However, long-term investors should keep this point in mind: Bonds have outperformed stocks over the last year, and the S&P 500 was essentially flat over the last 12 months through the end of August. Combined with the stronger performance across defensive sectors this year, we would remain cautious about taking on additional risk in this environment. As the chart below highlights, investors have had to weather choppier seas as of late, only to find they are still just treading water.

 

On a historical basis, September can also be a difficult month for stock prices, and average returns are generally negative, particularly over the last 20 years. Nevertheless, September returns heavily skew downward because of large declines in 2001, 2002, 2008 and 2011. Those years had very specific, event-driven circumstances that led markets lower, such as the 9/11 terrorist attacks, the financial crisis and the aftermath of a U.S. government debt downgrade.

Over the last 10 years, September has actually been favorable, with U.S. stocks gaining, on average, almost +1.0% during the month, according to FactSet. Importantly, once stocks can clear early autumn headwinds, prices see stronger tailwinds heading into the final months of the year. Considering the strength of returns in the front half of 2019, the seasonality tailwinds could be influential, in our view.

 

Trade remains the wildcard to watch

Much of the direction for stock prices through year-end revolves around developments in trade and the level of corporate profit growth. Trade tensions have worsened overall, and economic data in the U.S. are sending cautionary signals. Here’s what to consider as we move into the fall season:

  • The world’s largest central banks are easing monetary policy, which could be supportive for risk assets over the near-term.
  • Stock prices already reflect today’s known conditions and continue to demonstrate resiliency.
  • U.S. and China trade officials agreed to restart trade talks as well as walk back some previous efforts to escalate tensions. This has helped improve market sentiment over recent weeks.
  • Complicating trade dynamics is the fact that Washington plans to again increase tariffs on Chinese imports beginning on October 15. With the White House already skeptical of any meaningful progress coming from Beijing, and China’s unwillingness (so far) to make large concessions without a meaningful reprieve from existing tariffs, both countries could remain at an impasse.
  • Nevertheless, we believe there is a strong incentive for both sides to come back to the table and negotiate some form of an agreement. Unfortunately, the timing is likely in the distant future.

Given the uncertainty, the market may see more fits and starts moving forward. Investors should be diligent about the risks they are taking, own quality investments and be a little more cautious than they normally would be.

 

Data source: Morningstar Direct 

As of Sept. 9, 2019