Trade Tensions Create Headwind For Strong Economy

The second quarter was another eventful one, headlined by the United States engaging multiple countries in negotiations on foreign trade policies. These discussions ultimately created tensions and have led to a potential trade war, as several nations have raised tariffs against each other. Tariffs are taxes placed on particular classes of a country’s imports/exports. These can be harmful because they create an inflationary pressure on the price of consumer goods, making them less competitive with their foreign counterparts, and disrupt global supply chains. While what has been enacted and what is being threatened are significantly different, many investors fear that if the tariff battle escalates, it could lead to a slowdown for the global economy.

Despite the uncertain outcome of these trade talks sparking daily swings in global stock prices, the U.S. equity markets ended up having a strong quarter. The S&P 500, which serves as a representation of the largest American companies, returned 3.4%¹ for the three month period. Even more impressive was the performance of the Russell 2000, a benchmark for small U.S. companies, which provided a 7.8%¹ gain in the second quarter. While the tariffs are a headwind, the U.S. economy still appears to be heating up due to strong corporate earnings, increased capital expenditures and consumer spending, a tightening labor market, and persistent fiscal stimulus. Have you noticed all the “Now Hiring” signs?

Unfortunately, international equity markets didn’t favor as well as the United States. The developed markets, represented by the MSCI EAFE, were down 1.2%¹ and the MSCI benchmark for emerging market equities returned -8.0%¹ for the quarter. A strengthening U.S. dollar, political tension in the Eurozone, and moderating growth in China were all detractors to international equity returns over the past three months. Despite the poor performance last quarter, international equity still has promising long-term growth prospects and remains an important diversifier for equity portfolios. Recall that this allocation was among the strongest performers in 2017.

Entering the third quarter, we expect that the trade tensions will remain at the front of investors’ minds and with this may come more day-to-day volatility. That being said, there are many tailwinds present in today’s global economy that should help weather a potential storm. During times of uncertainty in the market, it is important for investors to review their asset allocations and make sure that their portfolios align with their risk tolerance and goals.  

Source:

¹Bloomberg