by Connor Darrell CFA, Assistant Vice President – Head of Investments
After four days of relative stability in equity markets, President Donald Trump took to Twitter on Friday morning to suggest that U.S. companies should “immediately start looking for an alternative to China.” Markets reacted negatively to the President’s tweet, and the S&P 500 ended the day down more than 2.5%, marking the fourth consecutive week of market declines. Elsewhere, Fed Chairman Jerome Powell spoke at an annual gathering of central bankers in Jackson Hole, Wyoming and discussed the challenge posed to fed policymakers by the uncertainty created by the administration’s strained relationship with China. Powell lamented that there is no playbook that bankers can consult in addressing the impacts of trade uncertainty on the macroeconomic environment.

Stocks Have Remained Resilient in Difficult Environment
The stock market has had a lot thrown at it over the past several months, including a continued escalation in the U.S.-China trade war, a yield curve inversion, Great Britain inching closer to a no deal Brexit, and weakening global economic growth. Yet despite all of this, U.S. stocks have remained very resilient and currently sit just five or so percent off of their all-time highs. Part of this may have to do with the shape of the yield curve and the lack of yield available in long-term bonds. On Friday, the yield on the 10-Year Treasury closed the trading day at 1.52%. Factoring in the current inflation rate of over 2%, a buyer of a 10-Year Treasury is likely locking in a negative real return unless we see a significant and prolonged collapse in the inflation rate over the next 10 years. This leaves investors with less options for long-term return generation, and the logical place to turn is to the stock market.  All of this creates a challenging environment for investors. The risks that seem to be surfacing in the global economy cannot be ignored and suggest a defensive posturing. However, the lack of yield available in global bond markets and the active suppression of interest rates by central bankers has made traditional defensive assets such as cash and fixed income increasingly unattractive. With that said, we continue to believe that the U.S. economy remains strong enough that a recession is not the base case scenario. Much of this is based upon the fact that there is considerable reason to believe that some of the softening in the global economy has been driven by geopolitical issues such as trade friction. The U.S. consumer, (which accounts for more than two thirds of GDP growth) remains very healthy at this point in time, and a reversal in trade policy would likely ease some pressure on economic growth rates.