Investment Team - Rfg Advisory Group .
published: April, 03rd 2018
Market Update 4.2.2018
The S&P 500 reached correction territory yesterday versus a January 26 high, with a total market pullback of 2.23%. Monday’s performance was driven largely by new information related to previous storylines surrounding technology sector weakness and the increased probability of a trade war.
While most people enjoyed a relaxing holiday weekend, the markets reflected on trade developments from China and new regulatory rhetoric surrounding the technology industry. First, China announced three billion dollars of tariffs on United States exports including 25% tariffs on American pork and eight other goods, along with 15% tariffs on fruit and 120 types of commodities. These measures were designed to be a tit for tat response to the Trump administration’s previously announced steel and aluminum tariffs. The relative size of these measures in comparison to the 22 billion dollars in agriculture exports to China last year according to the U.S. Department of Agriculture, supports this conclusion. In addition, several headlines over the weekend from Tesla (including a poorly timed April Fool’s joke) and Amazon (questions over whether the postal service should charge them more) drove continued weakness in the technology sector, with Amazon selling off 5.21%, Facebook down 2.75%, and Tesla losing 5.13%. All of these firms could undergo increased regulatory scrutiny which has caused investors to reevaluate their forecasted growth trajectories.
These narratives are challenging the fundamental driver behind the current bull market: growth. An increased probability of a trade war has implications across industries as most companies have reaped the benefits of open-markets. The fact that China has responded with retaliatory measures indicates, not unexpectedly, that they will take a more combative approach to trade negotiations than other countries. Despite Chinese leadership indicating that they would not like further escalation, their actions leave the possibility for more tariffs before a resolution. Combine this uncertainty with the regulatory environment where the President singled out Amazon for tax evasion and conduct detrimental to small business, and it presents a headwind for the market.
Despite this noise within the marketplace, underlying economic data remains strong and we are rolling into first quarter earnings season which we also expect to be positive. March auto sales numbers this morning were well above expectations, and we have yet to see any real “earnings” headwinds out of either trade or regulatory issues. As a result, we remain comfortable with our current Steadfast models positioning. We are evaluating some repositioning within our income sleeve and will keep you posted as that process develops.
Rick Wedell is not affiliated with LPL Financial.
Advisory Services offered through RFG Advisory Group, LLC, a registered investment advisor.
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