U.S. Stocks Drop on Trade War Rhetoric
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 03/23/18. Rates and Economic Calendar Data from Bloomberg as of 03/26/18. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
U.S. stocks experienced their worst weekly performance since January 2016 as fears over a trade war gripped markets. The S&P 500 Index lost 5.9%, the Russell Midcap index lost 4.9%, and the Russell 2000 index, a gauge of the Nation’s smallest publicly traded companies, lost 4.8%. On the international front, developed markets declined by 2.6% while emerging markets declined 3.4%. Turning to fixed income, the yield on the 10 year U.S. Treasury declined 3 basis points to 2.82% from 2.85% the week prior.
Entering last week, all eyes were on the Federal Reserve’s Wednesday rate hike announcement and accompanying press conference. In Jerome Powell’s first press conference as Chair, he announced an increase of the Fed Funds Target Rate by 0.25% to a range of 1.50% – 1.75%, an increase to forecasts for 2019 GDP growth, and an increase to the number of potential rate hikes next year from two to three. A smaller majority of participants continue to anticipate three hikes in 2018 as some now believe that four hikes may be appropriate. Overall the announcement and forecasts were in-line with consensus but carried a hawkish overtone, certainly nothing to justify the mass selling that took place on Thursday and Friday.
On Thursday, President Trump announced planned tariffs on approximately $50B worth of Chinese imports. A sharp risk-off tone took hold of markets and the Dow Jones ended the day down 2.9%, or as the media prefers OVER 724 POINTS! Selling pressure continued on Friday with additional declines of about 2% on the major averages. As we have written about several times this year, we expect market risk to increase this year as averages grind higher. Remember, while the term volatility is often associated with negative returns, volatility is not necessarily a one way ticket. Fortunately, Monday’s trading this week showed markets can experience large moves to the upside. The Dow Jones Industrial Average and the S&P 500 index both bounced back with gains of over 2% as investors looked through the headlines to the strong fundamentals that exist in this economic environment.
Given last week’s decline, stocks can now claim attractive valuations in additional to the strong macro-economic backdrop of global growth, low unemployment, and favorable financial conditions. This year is sure to test investors’ risk tolerance as precipitous market swings are likely to continue with traders increasingly focused on headlines. Longer term investors will likely continue to benefit from an investment strategy that is well-diversified, takes their objectives and risk tolerance into consideration, and focuses on market fundamentals. If you would like to have your portfolio reviewed or a more comprehensive financial planning exercise completed, please do not hesitate to speak with your Hennion & Walsh Financial Advisor.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
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