The major indices fell by the largest percentages in two years last week as investors feared a trade war between the U.S. and China. The Nasdaq was the worst performer among the major indices, declining 6.5%. Facebook fell 13.8% (roughly $75 billion in market value) following revelations that the political data analytics firm Cambridge Analytica, which had been given access to profiles of over 50 million users, had used the data, without permission, for political advertising campaigns. And, EU regulators are weighing a 3% tax on technology companies based on revenues generated from user data; Google?s parent company Alphabet (-9.5%) and Twitter (-12.8%) were also notable laggards during the week?s sell-off in Technology. All sectors fell, though Energy was a relative outperformer; crude oil prices rose following reports of declining inventories; also, Saudi Arabia?s energy minister suggested that OPEC?s supply cuts could be extended into 2019. Meanwhile, the Federal Reserve, as widely expected, raised interest rates by 25 basis points this week. Treasury yields rose ahead of the FOMC meeting in anticipation of an upward revision to the rate forecast for the rest of the year. The median expectations among Fed officials, though, remained at three rate hikes for 2018. And, concerns of an escalating trade dispute between the U.S. and China sent investors to safe havens; the spike in demand, especially for U.S. Treasuries, caused yields to decline. Finally, Congress passed, and the President signed, a $1.3 trillion spending bill that will avert another government shutdown.
On Tuesday, the Trump administration announced tariffs on $60 billion of Chinese goods, including a 25% levy on aerospace and communications technology products. The measure also includes restrictions on Chinese entities investing in U.S. businesses; in addition, U.S. trade officials plan to file an official complaint with the World Trade Organization regarding China?s trade and investment practices. On Friday, China issued a measured response: $3 billion in tariffs on a list of over 120 products, including wine and nuts, if the two countries fail to resolve their trade differences. Notably missing from the list, though, were goods such as soybeans and airplanes, both of which are major U.S. export products. The aim of the U.S. is primarily bringing China to the negotiating table; many economists agree with the While House?s assertions that China?s trade practices unfairly disadvantage U.S. businesses.
There are concerns over Chinese retaliations, but we think the impact is being overemphasized. A 25% tariff is being implemented on $50bn of goods, which is equal to $12.5bn of tariffs, not $50-60bn that were previously being discussed. This is equal to less than 0.1% of GDP and when taken in context of the $200bn of tax cuts, $100bn of incremental government spending and $500-700bn of expected repatriated profits, the market?s reaction is likely to prove as a buying opportunity. There is also a 60 day comment period on Chinese tariffs. The comment period for steel and aluminum tariffs led to significant exemptions and watering down of the original proposal.
Elsewhere, trade news was broadly positive. The White House dropped its demand that vehicles made in Canada and Mexico contain at least 50% of U.S. content; the issue was seen as a significant hurdle in NAFTA negotiations. Also, as expected, the U.S. granted exemptions for its aluminum and steel tariffs to the EU, Australia, Argentina, Brazil, and South Korea. The US is very close to inking a new trade deal with South Korea which should simmer down the trade worries just a bit. Trade discussions will likely remain in the headlines for the next several weeks; that is, until the upcoming first quarter corporate earnings season refocuses investors on economic and corporate news. We would add to positions on market weakness.
*Source: Pacific Global Investment Management Company
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Last Week's Headlines
1. Existing-Home Sales up 3% in February. Sales are up 1.1% over where they were 1 year ago. The median existing home price for all housing types is up 5.9% from this time last year. Last month's slow down may have been due to the unseasonably cold weather in the Northeast and Midwest.
2. The FOMC voted unanimously to raise the Fed Funds target rate to 1.50% to 1.75%.
3. Initial jobless claims was 229,000, up 4,000 from its previous measure.
4. The U.S. Census Bureau announced new orders for durable goods increased 3.1% in February. New orders for durable goods has been up in 3 out of the last 4 months. Shipments of manufactured goods has increased in 9 out of the last 10 months.
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