The market is consumed by the political rhetoric coming out of Washington. However, the most important overriding factors are still a vastly improving global economy and rising corporate earnings. This is ultimately the tide that shifts share prices.
The year is half over, the first rounds of promised tariffs have come to pass, and we are all still standing. President Trump’s desire to fulfill his campaign promises is clear, though both sides’ abilities to negotiate a new trade arrangement are less certain. What has become more apparent is that Trump’s aspiration to even the playing field in terms of trade, extends not only to China, but also to our allies in Europe and Canada. His ability to negotiate a better deal for US trade on a global scale would be a true achievement and only time will tell if the President is up to the task and if the other sides are willing.
With midterm elections looming in November, Xi has adroitly targeted the GOP’s base with tariffs focusing on the agricultural sector. We have yet to see the predicted outcry from the farm belt that many expected would inevitably come. There has been much talk of who has more to lose from these trade skirmishes, and we have yet to see China’s response to Trump’s latest threat of tariffs on $200bn more goods. However, Xi has telegraphed clearly that he is a reluctant participant in the escalating tensions, and with Theresa May’s newly weakened state in the UK, Trump is in a stronger negotiating position than ever.
The equity market has matched increasing geopolitical tension with volatility, though we expect much of this trade fear is already priced in as we are not seeing the widespread sell-offs that many predicted. Bond rates have been stable coupled with a hawkish Fed, signaling that reflation is well underway. The flattening of the yield curve continues to concern investors, but we believe that eight years of zero interest rates in addition to continued earnings growth have provided enough slack for the global market recovery to continue to run. Going forward we intend to focus on the fundamentals as we approach earnings season. Despite significant geopolitical noise, we expect to see positive profits buoy share values.