Zacks Investment Management

Could asset correlations add fuel to the market rally? And what do we see for trade negotiations and the government shutdown? Read on to get our view.

Are Tightly Correlated Assets a Cause for Concern? – a pattern has emerged in the new year, whereby major asset classes all seem to be moving tightly in lockstep. Generally speaking, under more normal market conditions asset classes often move in different directions, somewhat predictably (which is why diversification works more often than not to reduce risk). But over the past couple of weeks, correlations have hit their highest level in a year, with the S&P 500, 10-year US Treasury, and crude oil all moving together. Historically, it’s been observed that such trends have often occurred near major market turning points, which in the current environment could be a good signal – if it means giving more thrust to this rally. Tight correlations work both ways, of course, as a sudden unwinding of positions in one asset class could spill over into others, accelerating downside pressure. The causes for tight correlations tend to be when investors become overly focused on major themes, i.e., US-China trade war, China’s slowing economy, the Fed, government shutdown. We saw a similar outcome in 2015-2016, and it worked both ways – worries over China’s economy and recession, coupled with negative corporate earnings in the U.S., triggered sharp declines across markets with high correlations, but also gave way to a compelling “v-shaped” recovery in 2016 and 2017.¹

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A Hitch in the China-U.S. Trade Negotiations? For the better part of January, it appeared as though trade negotiations between the U.S. and China were moving along. Though Robert Lighthizer and Steven Mnuchin weren’t exactly on the same page as to what type of concessions would be acceptable, it appeared as though both sides were eager to reach a resolution. But a story this week by the Wall St. Journal reported that China is still very much pursuing its plans for technology dominance via Made in China 2025, which has been a point of contention for the United States. China 2025 aims to make China a “global leader in robotics, electronic vehicles, and other high-tech production.” But the pursuit of China’s goals comes at a great cost to U.S. technology companies, as Chinese policies still require forced technology transfer and restrict the ability of U.S. companies to enter Chinese markets. This revelation will no doubt be at the center of the next round of meetings between the world’s two largest economies, on January 30th.³

Government Shutdown Impasse Labors On – nearly four weeks into the longest government shutdown in history, and no clear path to resolution exists. Senate lawmakers are expected to vote on two measures this week – one submitted by Republicans and the other by Democrats – though neither measure is expected to advance. The impasse remains over the $5.7 billion of funding to build a wall along the border with Mexico, which Democrats have insisted will never be part of a final bill. Democrats have, however, proposed a potential $5.7 billion in funding for border security which would include fortifying ports of entry, adding more technology including sensors, drones and communications tools, and hiring more immigration judges and Border Patrol agents. Another possible proposal on the table would be to fund the government through February 8 while ongoing negotiations over border security continue, but it is unclear whether President Trump would support either measure.⁴

While we may not know how all these stories will pan out, or how they could affect the market in the long-term, having an investment advisor that helps you reach your long-term goals can be critical to your financial well-being

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• Is your advisor earning commissions on your investments?
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• Are you getting the right kind of performance? (Hint: It goes beyond returns)
• Do you know exactly what fees you’re being charged?

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