Tariffs and Trade War Threats Spark the Market

After overcoming objections from the White House, Congress passed a $1.3 trillion omnibus spending bill last week. The good news is that a government shutdown was averted. However, that may be outweighed by the prospect of more debt. Given US dependence on overseas investors to buy its debt, we now have to worry that foreign buyers of US Treasuries may reduce their purchases.

There also seems to be slight underlying trepidation in the markets about the rapid pace of personnel changes in the White House. For so long, stocks seemed immune to the turmoil in the White House — in fact, stocks exhibited a “Teflon” effect, whereby all political developments seemed to roll off without any impact. But that may be changing, at least temporarily. One area of concern is the rising influence of protectionists — particularly Peter Navarro, a trade deficit hawk who is now President Trump’s Chief Trade Advisor. Some notable “globalists” have also departed, including former Secretary of State Rex Tillerson and Gary Cohn, who resigned this month as Trump’s Chief Economic Advisor.

Also, by naming John Bolton as National Security Advisor to replace H.R. McMaster, I believe President Trump has increased the risk that the US will be drawn into one or more military conflicts — especially given Mr. Bolton’s hawkish foreign policy views. Then there are the recent changes to the Trump legal team vis-à-vis Special Counsel Robert Mueller’s investigation into 2016 election meddling, which may be unsettling investors’ nerves.

So, yes, there does seem to be some level of fear in the market. Here it’s important to note that the move into Treasuries last week was rather modest. On one hand, this would seem to suggest that fear is quite muted. On the other hand, we might just be seeing a change in what investors regard as a “safe harbor,” given that gold prices rose last week. In fact, the price of gold has been rising at the same time silver prices are falling. This could be viewed as a sign that economic concerns are increasing. When the gold-to-silver ratio has risen in the past, it has generally occurred during times of market turmoil, such as the 2008 global financial crisis.

While this was the worst week in two years for the stock market, the big question is: Will it continue? I believe the market will continue to be very turbulent, with a tug of war between positive and negative factors. This means stocks are likely to continue to rally and then sell off, with rotations in leadership among different areas of the stock market. I’ve written before about a market with a bark worse than its bite. For those who celebrate the Lunar New Year, it is the Year of the Dog; for investors, it is the Year of the Chihuahua.

What to watch this week

US consumer confidence and consumer sentiment. These indicators are likely to show that the mood of US consumers remains positive. However, there is a gap between sentiment and economic activity, with sentiment more positive than actual spending. US personal income and outlays are also being released this week, which should offer insight into whether consumer spending is more reflective of such positive sentiment.

Japanese retail sales and industrial production. There has been weakness in recent global data, and so it’s important to closely follow economic data in all major economies. This data should provide a good snapshot of how the Japanese economy has been faring recently.

Gross domestic product (GDP) results. Fourth-quarter US GDP is likely to show strong economic growth, driven by largely by consumer spending. While it will be important to confirm this, it is far more important to follow measurements of first-quarter GDP closely, given that the Atlanta Fed GDP Now Indicator suggests more disappointing growth.

GDP estimates for the United Kingdom, which are due to be released this week, should provide a sense of economic growth in the face of great economic uncertainty, as negotiations continue for next year’s Brexit. Canada’s GDP estimates should also be followed closely, given that its central bank hit the pause button on rate hikes due to concerns that rising rates have slowed Canada’s economy.

Eurozone economic sentiment. The eurozone’s economic sentiment index provides a broad measure of both consumer and business sentiment. This should, in turn, offer clues about the direction of economic growth going forward, particularly given recent signs of weaker economic data in Europe.

This article was republished with permission from Invesco Powershares.