by Connor Darrell CFA, Assistant Vice President – Head of Investments
Geopolitics dominated headlines throughout the week, as a sudden re-escalation of trade tensions between the U.S. and China forced global equities into one of their first weeks of solid losses all year. The S&P 500 shed a little over 2% of its value through week’s end, with international markets losing a bit more.

Despite appearing to be close to a final deal which would have enabled business leaders and markets to put much of the trade-related uncertainty behind them, Chinese officials reportedly backed away from multiple concessions they had made during prior negotiations. Chief among them were issues related to Chinese government subsidies, which have historically served to tip the competitive balance in favor of Chinese companies. In response, President Trump drew a hard line and raised tariffs on $200 billion worth of Chinese exports, effective immediately.

Elsewhere, diplomatic relations between the U.S. and Iran deteriorated to their lowest level in years after a U.S. aircraft carrier was deployed into the Persian Gulf in response to indications of potential planned attacks on U.S. interests in the region. Oil prices have inched higher as a result of the rising tensions in the region.

Amid all of this geopolitical “noise,” it is important to remember that long-term growth in equity markets is driven by earnings, which are far more connected to the strength of the consumer and the economy than to the patterns of global trade. Both the economy and the consumer remain on firm footing at this point in time.

Chinese Economy a Double-Edged Sword
It seems that at present, any new information regarding China’s economy may be a double-edged sword. During the later end of 2018, the data coming out of China seemed to suggest that its economy was weakening, and there was speculation that the weakening economic momentum was at least in part due to U.S. trade policy. The prospects of a weakening Chinese economy were among the list of factors blamed for the market volatility during that time, just as the subsequent inflection point was considered one of the keys to the 2019 rally. The problem for markets is that China’s improving economy may have emboldened its leaders during last week’s trade negotiations, perhaps setting the stage for the setback in negotiations.

Investors are now faced with a difficult proposition regarding China. On one hand, the improving Chinese economy is good for global markets, and bodes well for extending the global economic cycle. On the other hand, it provides Chinese negotiators with more leverage during trade negotiations, which makes it much harder for US officials to reach a satisfactory deal.  As we have seen, markets are very sensitive to meaningful shifts in the expected probability of a final deal being inked, but since market performance tends to mirror the health of the global economy and not trade patterns, long-term investors should place more emphasis on the economic data when positioning portfolios.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
A Friday rally (triggered by a very strong April jobs report) helped markets finish the week with modest gains as investors focused heavily on resumed trade talks between the U.S. and China, as well as the Fed policy-setting committee meeting. Markets were slightly disappointed by the news coming from both China and the Fed, and that weighed on sentiment throughout the week despite some positive earnings surprises from major companies. 

Too Much, Too Fast?
The S&P 500 has rallied more than 25% from its closing level on December 24, 2018. During that rally, there have been precious few opportunities for those who moved to the sidelines during the market turmoil to jump back into the fray. And while the market has resembled a swinging pendulum over the past eight months, investor sentiment has oscillated just as much. Ned Davis Research tracks a number of data points in an attempt to measure the magnitude of investor sentiment, and recently reported that sentiment has shifted into the realm of “excessive optimism.” Readings such as this are typically viewed as a contrarian bearish signal. 

It is rather remarkable for sentiment to move so wildly in just a few short months (that same sentiment indicator was signaling “excessive pessimism” back in December), and investors should be cautious about chasing the rally at this point in time. We believe that at current market levels, a near-term pullback would likely be helpful in resetting investor expectations and would present an opportunity for investors looking to move some cash back into the market.