Weekly Investment Strategy

Key Takeaways

  • No Definitive ‘Checkmate’ Winner in the Current Trade Negotiations
  • The Fed Awaits More Data as it Seeks to Avoid a ‘Blunder’
  • Earnings Environment May Dictate Future Capex ‘Moves’

Tomorrow (Saturday) is National Chess Day, a holiday that has been in existence since the proclamation of President Gerald Ford in 1976. The game revolves around ‘power and conflict’ where intelligence, strategy, and patience are key, and calculated risk reward trade-offs need to be assessed on a continual basis. To win, you need to make the correct moves and make sure your pieces are in the right place at the right time. Today, these same dynamics confront global policymakers and investors as President Trump and President Xi go ‘head-to-head’ in negotiating a trade deal, Fed Chair Powell weighs the potential impact of further interest rate cuts, CEOs assess capital expenditures and hiring decisions in the midst of potential negative earnings growth and investors seek to structure their portfolios amid unrelenting periods of volatility.

  • A Checkmate or Draw in the Trade Talks | President Trump and President Xi are in a prolonged, tumultuous game of ‘trade’ chess with many ‘pieces’ still in play. From agricultural purchases to intellectual property theft there are still major points of contention under negotiation. There is also the added ‘power’ dynamic as President Xi seeks to establish his legacy while President Trump desires to look strong to boost his re-election chances. We do not expect a clear-cut ‘checkmate’ winner in these negotiations. The most likely outcome is a ‘draw’ (no winner) with rematches periodically in the future. All attention will now turn to the November 14-15 APEC Summit in Chile, which both President Trump and President Xi are expected to attend and hopefully act to avert the more significant and economically damaging December 15 tariffs. In our opinion, the tariffs on the third $300 billion tranche of Chinese imports will be a ‘game-changer’ as those goods will directly impact the consumer and would likely have an adverse impact on the US and global economy.
  • Avoiding a Big Blunder | In the game of chess, a serious mistake occurs when there is some sort of tactical error, whether it is due to time trouble, overconfidence, or pure carelessness. A tactical ‘blunder’ is exactly what the Federal Reserve is trying to avoid as it seeks to continue the current record economic expansion (124 months). The Fed does have its fair share of challenges to maneuver given amplified pressure from President Trump and growing expectations in the financial markets for further rate cuts. These challenges will test the Fed’s patience as it awaits further economic data from around the globe. At a conference this week, Chair Powell reiterated that there is no ‘pre-set course’ for policy, but that previous and future Fed action has and will continue to be dictated by how the ‘pieces’ (e.g. economic data) are arranged on the board. He also signaled that the central bank would proactively begin to buy short-term Treasury securities “soon” to alleviate potential liquidity concerns in the repo market. We anticipate that weak global growth and muted inflation will also lead the Fed to implement one more 25 basis point ‘insurance’ rate cut before year end.