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.