Q2 2019 Newsletter
Volume 10, Issue 2 - July 2019
It goes without saying that U.S.-China trade tensions dominated the landscape of Q2 2019. So much so central banks began shifting monetary policy from tightening (hawkish) to easing (dovish) further evidencing the slowdown in global growth. This led to volatility across equity asset classes albeit both U.S. stocks and bonds continued to climb higher. The dovish tilt in policy supports this rise as investors hypothesize greater liquidity and lower interest rates lie ahead.
A more macro view lends itself to a strong labor market in the U.S. which continues to bolster consumer confidence evidenced by a historically low unemployment rate, job growth and most importantly rising wages. And while most economists agree that late-cycle conditions exist both domestically and abroad the above average conditions in the U.S. labor market seemingly bode well in the near-term. As we’ve mentioned before roughly 70% of Gross Domestic Product (GDP) is made up of consumer spending.
So, what lies ahead? As you know we do not speculate as what will happen in the weeks and months ahead, nor whether markets will rise or fall.
Historically speaking late-cycle conditions have, however, posed the most challenging phase with mixed performance in both equity and fixed-income asset classes. Again, the enhancements we made to the Tactical Allocation Portfolio (TAP) in 2018 have us excited that the model is staged to navigate whatever lies ahead. And we are always happy to discuss this with you in greater detail.
In terms of TAP the equity portfolio is currently fully allocated with the majority of positions riding their trend line. As stated in our most recent Weekly Market Update to clients of the firm ‘… the focus now lies on monitoring underlying exposure to risk and a trending equity market.’ Our intermediate term tilt on the fixed-income side continues its moderate rise all the while collecting and reinvesting dividends as can be expected.
As always we look forward to hearing from you and are always available to address questions, comments or concerns as it relates to your portfolio, plan or otherwise.
Fraser, Dudley, Alex & Josh
will there be winners in the U.S.-China trade war?
With recent talks running aground, the trade dispute between the United States and China looks like it’s here to stay. While most experts agree that both sides lose in a trade war, some note that resulting changes to supply chains and investment patterns could set some other countries up to be potential winners.
What’s at stake?
U.S. tariffs on Chinese imports—and China’s retaliatory tariffs on American goods—have already cut bilateral trade. Economists think the spat could eventually reduce global gross domestic product (GDP) by hundreds of billions of dollars.
That’s because the United States buys more goods from China than from any other country, importing $540 billion worth in 2018. American businesses and families benefit from low-priced goods, ranging from industrial machinery to consumer goods such as electronics, furniture, clothing, and toys.
Meanwhile, U.S. exporters send more than $120 billion worth of goods to China’s enormous market each year. The U.S. automotive, aerospace, and agricultural industries in particular have benefited from China’s economic expansion over the past few decades, and the U.S. government calculates that exports to China support more than nine hundred thousand jobs.
Is anyone benefiting from the dispute?
Some on the sidelines of the trade war could come out ahead, as companies shift production to avoid tariffs. Instead of “onshoring,” or bringing factories or farms back to the United States from China, firms are looking for replacement countries.
Potential winners include:
Argentina and Brazil. South American soybean farmers are expected to pick up the slack from falling U.S. soybean exports to China, which has historically been the top destination for U.S. soy. Brazil saw strong demand for its soybeans as China shifted its purchases to other suppliers. But the outlook for South American exporters has been clouded by other factors, such as Chinese goodwill purchases of U.S. soybeans in early 2019 and an outbreak of African swine fever in China, which has weakened demand for soy pig feed.
Mexico. The United States’ southern neighbor competes with China, exporting many of the same types of goods to the U.S. market, so it stands to benefit from Chinese products becoming more expensive. And if the updated North American Free Trade Agreement (NAFTA) gets passed, it could give Mexico’s exporters another boost—a prospect now threatened by President Donald J. Trump’s plan to impose new tariffs on Mexico.
South Korea and Taiwan. Both of these Asian tigers export a lot of the same electronic equipment that China does. Tariffs on Chinese products likely make South Korean and Taiwanese goods more competitive, despite higher wages in those two countries: 2019 trade data shows U.S. imports from both countries are on the rise.
Vietnam. The country has been called “the new China,” given its low wages and lax labor and environmental regulations, and it could be poised to expand its exports of manufactured goods to the U.S. market. Several firms have relocated production there in recent years, and U.S. imports from Vietnam have already risen 34 percent in 2019.
Shifting supply chains is costly, and businesses try to avoid it. Many analysts predict that once new supply chains form they will tend to stick around, even if the U.S.-China dispute cools. Trade-war winners could enjoy long-term gains even after a truce.
Of course, counting on any such gains is risky. A trade war that torpedoes global growth or leads to a recession in the United States would likely sink all boats.
Author: Andrew Chatzky
5 Threats to Prosperity
We’ll wrap up this edition of our newsletter with a message from our friend Brian Wesbury, Chief Economist at First Trust Portfolios:
These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
*The interpretations and organization of these ideas are the confidential thoughts of First Trust and do not represent the opinions of Berthel Fisher & Co. Financial Services, Inc
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*The interpretations and organizations of these ideas are the confidential thoughts of 1st & Main Investment Advisors and do not represent the opinions of Berthel Fisher & Co. Financial Services, Inc. nor Berthel Planning, Inc.
*Our firm does not provide legal or tax advice. Be sure to consult with your own legal and tax advisors before taking any action that may have tax or legal implications