If you haven’t noticed, it’s been a volatile year in the stock market. In fact, it kind of feels like a roller-coaster ride.
If you’ve never been to Disney World, Space Mountain is a space-themed, indoor roller coaster. You’re in total darkness, where you “feel the push and pull of gravity as you soar into a swirling wormhole.” With no visibility to help predict what’s coming next, Space Mountain whips you back and forth, then up and down. You feel as if you’re sealed in a wooden barrel going over Niagara Falls.
When I think about the markets over the past 12 months, I can’t help but think about this ride. In the last quarter of 2018, the market was down almost 10%; then, before you could put away your holiday decorations, it jumped up 12%.
Great, huh? But wait! By the time spring flowers were blooming, the market shot down 6%.
So, what’s causing the volatility? It’s the same story as last year.
Unless you have been living in a cave or think tweeting relates to birds, you’ve heard about the trade negotiations with China and now Mexico. The U.S. is imposing tariffs on Chinese imports (and possibly Mexico) until they negotiate a deal that involves China providing more favorable trade terms and behaving nicely when it comes to U.S. patents and technology.
According to David Kelly at JP Morgan, “Last year saw multiple rounds of U.S. tariff increases. In January, tariffs of 30% to 50% were imposed on imported solar panels and washing machines. In March, this was followed by steel and aluminum tariffs of 10% to 25%. Over the summer, the U.S. then imposed tariffs of 25% on $50 billion worth of Chinese goods followed by a 10% tariff on another $200 billion in Chinese goods.”
All of that may not sound like a big deal; however, the implications can be huge, and the Chinese economy has seen a significant slow-down.
This also affects countries like Germany. China is BMW’s largest customer, and all the other countries doing business with them like Australia, Japan and Korea.
Things were looking up at the beginning of 2019. It appeared that a deal would be made; however, matters quickly took a turn for the worse, when Chinese negotiators reneged on their previous commitments.
These global-trade issues roiled the markets, particularly as concerns spread to include Mexico and trickled over to the bond markets where U.S. Treasury-bond yields plummeted to lowest levels since 2017 – a surprise to all.
It’s gone from the Federal Reserve calling for two interest-rate increases in 2019, to the market reacting as if there’s a 95% chance it will cut interest rates by year’s end.
So, this trade deal needs to happen, especially considering the U.S. is flirting with an inverted-yield curve that may signal an impending recession.
While taking a hard line with China plays well with many parts of the U.S. electorate, it seems both the U.S. and China are strongly incentivized to compromise, given the negative effect on the economy and markets this spat is causing.
Thus, don’t be surprised to see a turn-around the second half of the year, if a final deal is announced.
Regardless, the themes from last year continue. The U.S. stock market has had a nice 10-year run, but sooner or later, the law of impermanence kicks in, and other more-reasonably-priced markets outside the U.S. will take over. Once again, I see the parallels to Space Mountain.
Last year, I took my family to Disney World. To my surprise, my kids had the same experience that I did in 1975, when Space Mountain was introduced. The ride hasn’t changed since its beginning!
In the same vain, the stock market volatility we’re experiencing this year, is just part of the same old roller-coaster experience. In this case, however, it’s been around since the early 1600s, when the Dutch East India Company became the first public corporation in world.
You achieve higher returns because of the ups and downs of stock prices. That’s why, here at Redwood, we continue to spread your money among various investments. We focus on a global stock-allocation favoring the cheaper companies, while also investing in government and corporate-global bonds across various maturities.
As always, we’re here if you have questions or concerns. Don’t hesitate to contact us.