Investment Commentary – May 21, 2019

Year to Date Market Indices as of Market Close May 21, 2019
Dow 25,532 (9.45%)
S&P 2,834 (13.07%)
NASDAQ 7,734 (16.57%)
Gold $1,297 (0.02%)
OIL $61.71 (5.99%)
Barclay Bond Aggregate (3.46%)
All World Index (10.10%)

Dow logs 200-point gain as demand for tech, energy stocks overshadow trade angst

Stocks closed solidly higher Tuesday, following a temporary reprieve on restrictions on U.S. exports to China telecom giant Huawei Technologies, reflecting a slight reduction in tensions on one front of the Sino-American trade fight.

How did the major benchmarks fare?

The Dow Jones Industrial Average DJIA, +0.77% rose 197.43 points, or 0.8%, to 25,877.33, while the S&P 500 index SPX, +0.85% gained 24.13 points, or 0.9%, to 2,864.36. The Nasdaq Composite Index COMP, +1.08% gained 83,35 points, or 1.1%, to 7,785.72.

What drove the market?

Stock buying returned to markets after technology sector losses. Losses Monday concentrated in the Shares of chip makers bore the brunt of declines after technology companies in the U.S. and elsewhere said they have started to comply with the White House’s ban on China’s Huawei Technologies Inc.

U.S. officials said late Monday they would offer some temporary exceptions to an export blacklist against Huawei Technologies Co., which will provide some suppliers and customers of China’s telecom giant a 90-day reprieve from tough trade penalties — a move that appeared to soothe investor anxiety somewhat.

However, the rhetoric didn’t let up on Tuesday as the chief executive of Huawei, Ren Zhengfei, fired back against the blacklist for his company, saying the U.S. government is underestimating how powerful his company will be in 5G in a few years. He also said the company has been stockpiling chips, and, therefore, is well prepared for that ban.

Meanwhile, nearly 200 American footwear companies, including Nike Inc. NKE, +0.95% and Under Armour Inc. UA, +1.44% wrote a letter to U.S. President Donald Trump, asking him to remove proposed tariffs on imported shoes from China. The companies said it would be “catastrophic” for consumers, corporations and the U.S. economy.

Tariffs, Tweets, Trade and Trump: An Update

We assess some likely costs to the United States, China, and the rest of the world from the current round of tariffs—and a potential future escalation.

In a recent interview, the President of the United States commented on an optimistic trade policy tweet he issued only moments earlier: “It seems to be having quite an impact on the market. I looked—the market was down. Now I think it’s up.”1

But as the chief executive well knows, the tweet giveth, and the tweet taketh away. After a series of social media broadsides by President Trump against China’s trade policy last week, the United States announced additional tariffs on Chinese-produced goods on May 10, sending global markets sharply lower in response. (China countered with its own tariff announcement on May 13.)

The U.S. administration is clearly weighing market reaction to its current actions, but at the same time investors are trying to absorb how far the White House will press China. While the economic impact depends on the ebb and flow of negotiations, beyond the tweets that batter markets we think the main issues are as follows:

We believe an increase in the tariff rate to 25% on $200 billion in Chinese imports will increase inflation and slow growth in the United States by slight amounts. But imposing tariffs on the remaining roughly $300 billion in imports—something indicated as a potential follow-on move by the U.S. government—potentially will notably increase inflation and decrease growth, in our view.

Spillover effects could make all of these developments more pernicious than simple accounting exercises. For example, non-Chinese producers could raise prices as they are shielded from Chinese competition. Alternatively, Chinese exporters are more dominant in certain products, and this will make it difficult for the firms that depend on these inputs to find cheaper alternatives.

Much like his instinctual grasp of market timing, the U.S. president is attuned to the economic cycle. And in this respect, the timing is relatively favorable for a small trade war as U.S. employment is strong and inflation is subdued. But pressing China further may risk a more adverse reaction in markets.

Around the Web:

Trade progress: While tensions with China escalated, the Trump administration reported progress in trade talks with other nations. On Friday, negotiators reached an agreement with Canada and Mexico to end U.S.-imposed tariffs on steel and aluminum, and the United States delayed a tariff decision involving imported auto parts.

Retail therapy: A flurry of reports from retailers is closing out quarterly earnings season, and several major chains reported strong first-quarter results in the latest week. While more retailers will be reporting data through the end of May, about 80% of those that have announced results so far have beaten analysts’ earnings estimates.

Upcoming events:

Wednesday: Release of minutes from April 30–May 1 meeting of the U.S. Federal Reserve Board














Other Notable Indices (YTD)
Russell 2000 (small caps) 13.45
EAFE International 9.10
EAFE Emerging Markets 5.25

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.