June 2019 Market Update - China Trade War

After the S&P reached a new high in April (Dow came within a few points), the stock market got a little twitchy in May. From April 30th to May 13th the Dow dropped 1268 points or almost 5%, and then dropped another 510 points to end the month at 24815, a 6.7% loss for the month. Turning to politics, many blame the stock market decline on the impasse that President Trump has with China over the issue of trade, as well as his threat to impose a tariff on Mexico unless they help us curb the illegal migration across their country from Central America. I sent out quick emails last month having to do with the trade talks and their effect on the markets. I tend to look at things through what I like to believe is a common sense lens. You see, in the past, all the negotiators for America have been politicians. Politicians see an agreement with a foreign entity as a win and a lack of an agreement as a loss. So what if they gave the farm away, they got a signed agreement. That, they think, is a feather in their cap. Those foreign countries have always been able to take advantage of our seemingly desperate need to reach an agreement, any agreement. Now they’re flummoxed over the stance America is taking today. Our current negotiators are demanding that the agreements be, above all else, fair to the American people. The Chinese negotiators initially agreed to a fair deal, and sent it back to the Chinese Politburo. The old guys there, not used to having to play fair, balked at the deal and refused to agree to it. The President was ready and responded with tariffs on the goods they send here that were equal to the tariffs on the goods we send there. The Chinese ‘retaliated’ by placing more tariffs on farm products we sell them. That’s an obvious calculated move by the Chinese to hurt one of the strong support bases of the president. The American news media breathlessly reported that our farmers will be mortally wounded by the Trump Administration. What they fail to report, though, is that America exports only 5.9 billion dollars of farm products to China. China, in the meantime, exports 186.5 billion dollars of electronics to us. In total we export 120.3 billion dollars of goods to them (less than 1% of our output), whereas they export 539 billion dollars of goods to us (almost 7% of their output). In addition, the US economy is doing well at this time. The Chinese economy is starting to falter. In that scenario, just looking at these facts with a bit of common sense, who do you think will blink first? Personally, knowing these facts, I’m not too worried that the trade deal (or lack of one) will lead to a long-term downturn in the stock market. In the overall scheme of things it’s noise and the subject is good for a few headlines for a few days. My concern is more the exploding federal deficit and debt. The more debt we accumulate the more interest we have to pay on it. When George W. Bush left office in 2009 the federal debt was just over 10 trillion dollars, now it’s over 22 trillion. Deficit spending in a bad economy is one thing, deficit spending in a really good economy is something else. This bull market we’re in is the longest in history. There are many predictions for a 1929-like crash. But in most cases, the people calling for that kind of crash have something to sell you that will ‘save’ you ‘when’ it happens. That’s why I take their predictions with a healthy dose of salt. As we continue to manage our portfolios and make the trades called for by our research, we continue to tweak our models to try to eliminate or at least reduce any allocations that were invested wrong in the past. Our research partner uses three indicators to help us decide which strategy we should have our models in at any one time. We call them our short, medium and long-term indicators. If they’re all positive we will be invested in the “Bull” strategy. If one or two are negative we will go to the “Neutral” strategy. And if all three point negative, we will employ the “Bear” strategy. At the end of the year in 2018 our indicators were all stuck on positive when one of them should have turned negative. At the beginning of 2019, one of the indicators was stuck on negative, when it should have turned positive before the end of the quarter. We have adjusted our research so that shouldn’t happen anymore. And there is a new indicator coming that looks good for making our models even more responsive to what the market is telling us. I’m very excited about this and look forward to sharing it with you once I know more about it and how it works. As always, we seek your input so that we can continually improve our service to you.