Uncertainty is Opportunity: Trade Concerns in May

This past week in the equity markets saw U.S. stocks waver in the face of new tension between the U.S. and China, as both countries locked into a standoff over unresolved trade disputes. Investor anxiety over the tensions led to indexes retreating, a change of pace from 2019’s first quarter of steady growth fueled by robust economic data, and growing investor optimism. As eyes turn toward the world’s two largest economies for resolution, fears of a trade war persist, while many are hopeful that the turmoil can be resolved quickly.

On Sunday, May 5th, President Trump tweeted allegations that the Chinese government was attempting to renegotiate a trade deal set to settle shortly. President Trump also promised (and delivered) a tariff hike on $200 billion of Chinese goods, up to 25% from the previous 10%. Chinese leadership responded to President Trump’s message by hardening their stance, taking a more aggressive approach than expected from the White House. On Friday, May 10th, the U.S. made good on their tariff promise and were quickly countered with Chinese officials announcing a retaliatory tariff hike on $60 billion of U.S. imports, effective June 1st. In public statements from both sides, neither country expressed willingness to back down from their tariff hikes. Despite President Trump’s hard-line approach to recent negotiations, his commitment to meet with Chinese President Xi Jinpig at the G20 international conference in June still provides an opportunity for a deal to be struck.

The market response has reflected the global tension, with major indexes taking their worst monthly losses since December of 2018. Uncertainty seems to be the primary driver, as earnings and economic data still hold strong. Year-to-date, the gains in the stock benchmarks remain impressive, with the Dow Jones Industrial Average up 8.6% and the S&P 500 up 12.2%. Much remains to be seen, as the trade conflict certainly has the potential to undermine gains if it continues, but so far, does not seem to be impacting the integrity of the global markets.

At Narwhal, we don’t celebrate down markets, and no one likes losing money, but we certainly aim to capitalize on dips. Volatility in 2019 does not surprise us, and since the end of 2018, the consensus of our investment committee has included expectations of continued volatility. The market dip has allowed us ample opportunity to buy companies that we still value as robust. Our commitment to hold cash in client accounts pays off in months like this, and our disciplined approach to asset allocation lends itself to buying dips when opportunities arise. Although it’s tempting to read into macro market movements, we hold to a philosophy of focusing on individual companies that can weather market volatility over time thanks to strong fundamentals and what we believe to be valuable.

We also encourage a closer look at the underlying components of the current market condition, and barring “headline volatility,” the global economic environment continues to show strong signs of healthiness. Furthermore, we endorse a cautious approach to taking headlines at face value. News outlets are often guilty of using incendiary language to grab the attention of readers, and it usually results in escalating fear in the markets.

On May 6th, MarketWatch.com, a publication of the Wall Street Journal, reported “Market Calm Shattered” due to tariff escalation. Although “shattered” implies destruction, the Dow Jones Industrial Average was only down -0.73% at the time of publication, more of a blip than a shattering. Our recommendation is to look at levels before headlines. At market close on Monday, May 13th, the S&P 500 sat at 2811.87 points, down from last month’s high of 2945.83, which sent media outlets into a frenzy of negative speculation. However, it had only been 48 days prior, on March 28th, that the S&P 500 passed 2811.87 points amid excessively positive market sentiment. It’s incredibly easy to read a headline and latch on to the hope or fear that the publication offers. Our approach is to always evaluate opinion within the context of the greater market picture. With the year still young, and the S&P 500 up 12.2%, there is plenty of reason to take a step back and take a deep breath.