What’s next for U.S relations with China? And North Korea? And could the cyclical stocks rally be a good sign for the market? Read on to get our answers and more in this week’s Steady Investor!
A Mixed Bag of Economic and Geopolitical News: Asia – U.S. relations with China and North Korea remain in a tense state, where markets remain in continued hope for some kind of positive breakthrough. This week delivered a mixed bag of economic and geopolitical news. Let’s start with China, where a modest relief came to the markets in the form of President Trump and trade czar Robert Lighthizer confirming that the United States would postpone increasing tariffs to 25% on $200 billion worth of goods, which were scheduled to take effect on Saturday. President Trump cited “substantial progress” in talks with the Chinese and Mr. Lighthizer appeared to confirm the same, though Lighthizer paints a picture where the gulf between the two countries remains wide. Both leaders appear eager to reach a deal – it would mark a major victory for the Trump Administration, and the Chinese government appears increasingly concerned that their economy is feeling the pressure. Just last week, China’s president, Xi Jinping, summoned hundreds of government officials to meet with a sense of urgency about holding ground and re-committing to China’s long-term growth goals.1
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Meanwhile, in Vietnam…Much attention was focused this week on President Trump’s summit with North Korean leader Kim Jong Un, with the international community hoping for a breakthrough in nuclear disarmament talks and peace on the Korean peninsula. The world got neither – talks ended abruptly as the North Korean leader would not offer full dismantling of the country’s nuclear infrastructure, and President Trump would not offer an end to sanctions for anything less. President Trump emphasized that the U.S. is not in any hurry to reach a deal, as long as no nuclear or missile tests were conducted in the meantime.3 A hopeful, but not conclusive, result.
Cyclical Stocks Rally – A Good Sign for the Markets? – U.S. and global equities have delivered a fairly sustained rally since the sharp correction that ended on Christmas Eve. The rally has largely lifted all boats, and investors with broad, diversified equity exposure probably (hopefully) participated in the upside. But one category in particular that has been a leader in the turnaround is cyclical stocks – which, interestingly, tend to be highly sensitive to U.S. economic health. Cyclical stocks, historically, have tended to do very well at the start of a new economic expansion, since that’s when the U.S. economy is expected to accelerate the most coming out of a recession. So, seeing cyclical stocks perform well this late in the cycle is an encouraging sign. Specific categories that have experience strong rallies over the last two months include Industrials, Financials, and Energy stocks, all of which could continue to benefit moving forward as the Fed pauses interest rate increases and stops runoff of its balance sheet.4 A trade deal with China could add more tailwind to this category, in our view.
While Everyone Watched Michael Cohen and Kim Jong Un…Federal Reserve Chairman Jerome Powell entered his second day of testimony to discuss the Fed’s plans and the state of the US economy. Mr. Powell cheered markets by reinforcing plans to stop shrinking the Fed’s $4 trillion portfolio of bonds later this year, and gave further indication of the Fed’s willingness to remain patient as the year progresses.5 The next rate-setting meeting takes place on March 19, and the market largely expects the Fed not to make any changes to interest rates.
How to React to Volatility? One challenge that many equity investors are facing and will most likely continue to face throughout the year is how to react to volatility. In our view, it is important to remember that volatility is a normal part of the ebb and flow of the markets. We believe the key is not to look for ways to eliminate it, but to develop a mental approach to dealing with it.
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Disclosure