A Positive Start to December

Written by By John Cox, CFA, CAIA on December 3, 2018

Whether it’s referred to as the “Trade Truce” or the “Tariff Cease-Fire,” the Group of 20 (G20) summit in Buenos Aires, Argentina from November 30 to December 1 yielded some degree of progress. Though details are still emerging, we know that President Trump and China President Xi agreed to a three-month delay on the proposed 25% tariffs on $200 billion of goods imported in to the U.S. These additional taxes were originally supposed to take effect on January 1, 2019. In exchange for this delay, China agreed to buy more agricultural products from the U.S. and reduce tariffs on imported automobiles. Additionally, there will be future discussions about other points of contention, such as technology transfer and intellectual property protection.

In the short term, investors saw this as positive news, and the initial market response was to rally. It is not clear if enough progress was made to provide momentum for the rest of 2018. This is the second piece of recent good news, as Fed Chairman Jerome Powell intimated last week that current interest rates were “just below” neutral after rattling the markets earlier in the quarter by saying that rates were still “a long way” from the neutral rate, which is the level whereby Federal Reserve policy is not attempting to stimulate nor restrict the economy.

Investors continue to watch housing data, auto sales and other consumer data that might indicate a slow-down. The job market remains strong, and wages are increasing; therefore, the recent disappointing trends in the housing and automobile industries may only be temporary. As we approach the new year, the focus will likely shift back to corporate earnings. Corporations will have benefited from lower tax rates for a full year, and Wall Street will be looking forward to the amount of sustainable earnings growth, excluding the tax impact. While it’s hard to believe, we are approaching the 10th anniversary of the market and economy’s trough, following a brutal period from October 2007 through March 2009. At this point in the business cycle, future returns are not expected to be as robust as those over the last five to ten years.

In summary, while there are still some headwinds when it comes to extending this bull market, there is cautious optimism that at least a small amount of progress has been made in lifting the darkest cloud over the markets—the threat of a global trade war.

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