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Market Update August 2019: Deciphering the US-China Trade

Dear clients and friends,

The last week or so in the financial markets have been a bit concerning. The stock market has taken a downward direction once again due to the China trade thing. Recently, the US imposed further tariffs on Chinese imports as a bargaining tool in upcoming talks. These tariffs effectively would make goods from China more expensive. In retaliation, China devalued their currency, thereby making goods from China cheaper to US consumers. From an economic theory perspective, both of these moves are negative. The change in exchange rate is particularly concerning because it raises a great deal of uncertainty as to future moves by China.

From a stock market perspective, we have two concerns. The first one is of course the uncertainty of more politically motivated moves that can affect earnings, and secondly the effect of the already made moves to the profitability of companies.

In my opinion, at least with companies that are US based and derive most of their profits in this country, the first concern is by far the bigger one. After all, as far as the US is concerned, Chinese imports were made both more expensive and cheaper by these two moves. Those moves are opposite and will to some extent lessen or even cancel the overall effect. The uncertainty factor, is as usual the thing that will make the market jump or tumble in the near term. Remember back to the 4th quarter of last year. There was a pretty big drop for no real reason, based on uncertainty over interest rates and the economy. That of course was short lived, as people came to their senses once they had reviewed the real economic data and not just acted based on speculation.

As of right now, we are in “wait and see” mode. It is very likely that all this is just political posturing as it has been the last half dozen times or so over the last couple of years and will just blow over. I do not believe that either the US or China will willingly scuttle its economy over this. It is very likely in the short term that there will be more of a downturn as speculators take advantage of investors’ panic. However, in the long term the market should realize the economy is doing quite well right now.

Finally, and most importantly, “Don’t fight the Fed.” The Fed just lowered interest rates, signaling it has its eye on the economy and is ready to continue its ridiculous level of stimulus if we show signs of economic weakness. Right now, 10 year treasuries are trading below 1.75% per year. Interest rates that low create a huge amount of upward pressure on the economy and the stock market. It is too soon in my opinion to do any large buys, but if this latest political fight pulls the market down significantly, we will be ready to buy.

As always, if you have any questions or concerns, please don’t hesitate to contact us about your particular situation.

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