Key Points
  • Stocks have had a bumpy ride as the flow of potentially disturbing information increases. The ratio of noise to importance appears to be growing and knowing the difference between the two is important.

  • Trade concerns continue to dominate the headlines; but tighter monetary policy and financial conditions, alongside higher inflation, are also keeping stocks from making headway out of the range they’ve been in since February.

  • China has multiple tools to attempt to fight a trade war, but currency manipulation may not be the way they go.

“It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.”
- Adam Smith

Smoke or Fire?

Much like the fireworks that many of you may have enjoyed as Americans celebrate the Independence Day holiday, investors have been bombarded with lots of noise and smoke as of late. Stocks have pulled back from the top of the range, and volatility has increased. Risks of a damaging trade war have risen. As of this writing, the $34 billion in tariffs that the United States is putting on Chinese goods is a literal drop in the bucket of a nearly $20 trillion economy, but it is the “second derivative” effects that we believe could be more serious. If the confidence of consumers or businesses is shaken, the potential for spending and capital investment to level off or decline grows, which could lead to a short-circuiting of the economic expansion and/or bull market.

Contentious trade negotiations have occurred in the past, but the fact that they’re being played out so publicly is a new phenomenon—resulting in rising trade-related market volatility. Although markets are clearly reacting to the day-to-day trade news, investors should refrain from trying to trade around the volatility.

As noted, trade isn’t the only cause for concern, as a rising dollar, slowing global economic growth and the possibility of a central bank mistake all appear to be impacting sentiment. We’ve seen stocks with greater international exposure—such as those in the technology and industrial sectors—get hit over the past couple of weeks as trade policy and a rising dollar—which makes U.S. goods more expensive to foreign buyers—have weighed on the sectors.