Three key policy issues achieved greater clarity last week. The United States and China reached a “phase one” trade deal. The United States will reduce some existing tariffs and not implement a set of planned tariffs in exchange for greater grain exports and some improvement to technology regulation. China is pressing for phase two negotiations to begin soon.
British voters affirmed their support for leaving the European Union. With the landslide victory for Boris Johnson, Brexit looks likely to happen in the early part of next year. The Federal Reserve kept rates steady and signaled rates will stay low for the foreseeable future.
Investors cheered the news. The S&P 500 gained 0.8 percent higher last week and reached a new record high. The global MSCI ACWI gained 1.3 percent as global stocks benefited from hopes for a more stable trade environment and greater clarity on Brexit. The Fed’s signal that rates would stay low supported a 0.3 percent gain in the Bloomberg BarCap Aggregate Bond Index.
This week’s news won’t be as packed as last week’s. U.S. industrial production and an update on personal income will provide some insight into manufacturing and consumer strength.
Data as of 12/13/19
Standard & Poor's 500 (Domestic Stocks)
Dow Jones Global ex-U.S.
10-year Treasury Note (Yield Only)
Gold (per ounce)
Bloomberg Commodity Index
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, MarketWatch, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
The Picture is Getting Clearer as Uncertainty Fades
If the global investment landscape were photographed, parts of the picture would have excellent clarity and others would be so blurry as to be indistinguishable. But, last week, important parts of the picture became clearer. Markets received key information on U.S.-China trade, Brexit, the future path of the Federal Reserve, and impeachment. The first three issues have been contributing major uncertainty to markets for years, and the impeachment trial of President Trump has added additional uncertainty. After reviewing the clarity gained in each of the four issues, this article concludes with some thoughts on how to invest when the picture begins to clear.
The United States and China reached a “phase one” deal in which the United States will not implement tariffs scheduled for last weekend and will gradually reduce the tariffs on some goods from 15 percent to 7.5 percent in response to the Chinese making structural reforms in the areas of intellectual property and technology transfer. China will avoid making the more drastic changes sought by the United States and resume buying agricultural products in greater quantities. China will also reduce some tariffs. Phase two negotiations will seek to address the more challenging structural issues. This deal sets the tone for less friction in the relationship. Negotiations may make progress if the Chinese are willing to make concessions. The improved stability should provide a steadier policy and reduce the risk of an all-out trade war.
Boris Johnson’s gamble to force elections worked. The large majority and the focus of the campaign give Johnson a mandate to leave the current relationship with the European Union early next year. After being delayed more than three years, Brexit is likely to begin. The next step will be to negotiate trade deals with Europe and the rest of the world. While uncertainty around that step remains, Europe can most likely move on from the Brexit drama.
Federal Reserve Policy
Between the unanimous decision to keep rates unchanged, the press release and Chair Jerome Powell’s press conference, investors gained insight into the Fed’s plans for the next three years. Interest rate hikes will be minimal and slow. If inflation runs above the 2 percent target for a short period, the Fed is unlikely to respond with a series of rate hikes. More likely, it will leave rates lower until there is “persistent and significant inflation.” Because inflation has failed to reach its target consistently, the low-rate environment will likely continue for years to come.
While the most divisive issue for most Americans (not for the British), impeachment is the least impactful on portfolios. But, the prospect has created uncertainty, and the path forward now seems relatively clear. The House will vote to impeach the president, largely on party lines. The Senate will take up the trial and, largely on party lines, likely vote to leave the president in office. While you may be angry, relieved, or indifferent, the risk of deadlock in Washington or a major transition before the election now looks unlikely.
When markets drop or uncertainty is high, our final advice is often to stay invested. Uncertainty is a normal part of investing. Bearing the risks of uncertainty is what investors get paid to bear. The path forward on the major issues of 2019 is now clearer. When the investment landscape comes into better focus, the key is not to become overconfident and increase risk. Enjoy a brief moment of clarity. Risks seem to come up in the most surprising places.
Rather than a fun story, this week’s parting thought honors a great public servant. Paul Volcker, the former chair of the Federal Reserve, passed away this past week at age 92. Volcker was appointed to head the Fed on July 25, 1979 by President Jimmy Carter during a period of high inflation. Through a series of rate hikes, he was able to tame inflation and help reestablish trust in the U.S. economic team. Volcker was reappointed in 1983 by Ronald Reagan and served until 1987. He also served as an advisor to the Obama administration and helped shaped bank regulation after the financial crisis. His efforts to curb inflation were part of the successful efforts to move the United States beyond the economic malaise that stunted growth during the 1970s. Investors owe him a debt of gratitude for his service.
https://www.barrons.com/articles/lots-went-right-for-investors-this-week-the-dow-still-ended-friday-on-a-flat-note-51576282633?mod=hp_DAY_4 (or go to https://peakcontent.s3-us-west-2.amazonaws.com/+Peak+Commentary/12-16-19_Barrons-Lots_Went_Right_for_Investors_this_Week-The_Dow_Still_Ended_Friday_on_a_Flat_Note-Footnote_1.pdf)
https://www.economist.com/britain/2019/12/13/boris-johnsons-big-win?cid1=cust/ednew/n/bl/n/2019/12/13n/owned/n/n/nwl/n/n/NA/360436/n (or go to https://peakcontent.s3-us-west-2.amazonaws.com/+Peak+Commentary/12-16-19_TheEconomist-Boris_Johnsons_Big_Win-Footnote_2.pdf)
https://www.wsj.com/articles/us-china-confirm-reaching-phase-one-trade-deal-11576234325 (or go to https://peakcontent.s3-us-west-2.amazonaws.com/+Peak+Commentary/12-16-19_WSJ-US_China_Agree_to_Limited_Deal_to_Halt_Trade_War-Footnote_3.pdf)
https://www.economist.com/graphic-detail/2019/04/12/do-people-become-happier-after-40 (or go to https://peakcontent.s3-us-west-2.amazonaws.com/+Peak+Commentary/12-16-19_TheEconomist-Do_People_Become_Happier_After_40-Footnote_5.pdf)