Recently we asked five influential advisors the same two questions: What about today's market concerns you, and what are your expectations for the rest of 2018? All five had the same answer: The prospect of a trade war between the United States and China.
Yet each advisor gave a different reason for their concerns—and some aren't letting their worries about U.S.-China trade dampen their outlook for the rest of 2018.
Their answers (lightly edited for space and clarity) are below:
Chairman & Chief Investment Officer, Cumberland Advisors
I am most concerned about trade tariffs, protectionist quotas and barriers to international commerce. Tit-for-tat trade exchanges have led to very bad outcomes, if we examine history. And we’re picking a fight with the second-largest economy in the world, China—soon to be the largest, within an estimated five to seven years.
One can say this is the president's "style." Well, I don't like his style; I don't like governance by tweet. However, the results may end up being OK. After all, he threatened dismemberment of NAFTA, and he's backed away from that.
Clearly, some people are saying to him that Canada and Mexico are our largest trading partners, and that while you can bluster, the fact is we want to make a deal, not kill it. So maybe that's going to work with China, too. Maybe not. We're going to find out.
Trump is playing out a dangerous narrative. His behavior doesn't lend itself to achieving the confidence of a market agent. He picks a playground-bully fight with Joe Biden; he tweets factual inaccuracies. He doesn't like an editorial in the Washington Post, so he picks a fight with Amazon. These are behaviors that show childlike decision-making. They do not inspire confidence.
I'm bullish. Now, you might say to me, "How can you be an optimist after what you just said?" Because we’re in a surge of earnings growth. It's not just because of taxes, but because we have a huge transition from loose monetary and tight fiscal policy to loose fiscal policy and tightening monetary policy. That transition has been proven by a great investor—George Soros—to be the healthiest one, notwithstanding the bumps along the way.
We're making that reversal of policy, and we're doing it with additions of tax incentives and front-loaded fiscal stimulus over the next two or three years. We're not going to have a recession.
So I'm fully invested today. My biggest overweight is in the banks. The PowerShares KBW Bank Portfolio (KBWB) and the SPDR S&P Regional Banking ETF (KRE) are two great ETFs. I believe the financial sector is recovering after years of punishment, and has a very long accelerator to earnings ahead of it.
Principal & Chief Investment Officer, ThirtyNorth Investments
We have had a few calls about the Fed tightening and rising interest rates, to headline risk over North Korea, to trade wars. It runs the gamut.
Any time there's volatility, though, I'm concerned that clients might make rash, emotional decisions that would take them off track of their financial plan.
There's always going to be volatility in the market. There will always be another downturn, but keeping investors on track, that's really the main job of an advisor in these markets.
I think the extremely low volatility we saw in 2017 is done. What we've seen in the past few months, that's more normal. I expect similar levels of volatility ahead.
The Federal Reserve is tightening, and that generally works against the stock market. But at the same time, companies are still reporting strong earnings. Economic numbers look really strong. So, really, I would not be surprised to see the market close down for the year, or have another nice return year. Anything could happen.
CEO & Founder, Purview Investments
New York City
First, a prolonged trade war between the two largest economies may translate into higher inflation in the U.S., it may disrupt supply chains, and might challenge corporate earnings in both directly and indirectly affected industries.
Second, a trade war could potentially migrate to a capital markets war. China is the U.S. largest creditor, being the largest holder and buyer of Treasuries. If China slows the pace of its purchases, it might raise the cost of capital at a time when the U.S. could least afford it, with its reduced fiscal budget and more planned spending on the way. Everybody who needs to borrow money could be affected, whether it's the U.S. government or U.S. corporations.
Third, central bank risk. This is something I haven't heard many people talking about as a cause for concern, but two of the four most influential central banks in the world—the Fed and the People's Bank of China—have new governors this year. Many expect the two will extend their previous policies. That’s a reasonable assumption under normal conditions. However, any extreme capital market turmoil might call for decisive, new policy shifts, which will become a major test for their ability to handle potential crises and their willingness to collaborate.
I think we'll see continued market volatility and shifts in market leadership. Momentum and growth styles may [fall] out of favor. More consolidation is possible, as the market may give back some of the huge run-up since election, due to the fading of assumptions on monetary and fiscal stimulus.
This tech retreat may be the start of a major sector leadership rotation. [Though] the tech giants as drivers of the economy may well continue, their prices and the valuation of the sector [as a whole] might have gotten ahead of itself.
Managing Director & Certified Wealth Strategist, Shell Capital Management
Most of our clients are advisors, so we mostly hear from advisors what their clients are concerned about. It seems most individual investors are primarily concerned about geopolitics and matters they hear in the news.
But some potential trends we're concerned about are: The current nine-year bull market in U.S. stocks is very aged. Based on the Shiller P/E [ratio], it’s also extended, since this is the second-most-expensive valuation in history.
[Also], the Fed is not only raising interest rates, but reducing its bond securities holdings, which effectively reduces liquidity in the financial system.
No one knows what’s going to happen next or how the year will end, but our systems suggest this is a nontrending, volatile market condition, where markets swing up and down in a wider range without breaking out into a definitive direction. We expect to see a continuation of these wider market swings for some time.
Managing Partner, Beaumont Financial Partners
Lead Portfolio Manager, Beaumont Capital Management
The Fed has a history of raising rates too far, too fast. Since 1913, 85% of all recessions have been preceded by the Fed raising rates. But now they also have to unwind almost a decade of quantitative easing. They've never had to do this before. So the effects are really unknown.
That combination has us concerned in its own right. But now the Fed has to deal with the effects of a new tax package; and much larger annual deficits, estimated to be around $2 trillion for 2018 and 2019.
On top of that, we've got the Trump administration brandishing a sword with trade, whether it's with Canada and Mexico over NAFTA, or now with China. The Trump administration's policy clearly already failed back in the Great Depression, with Smoot-Hawley. And trade war concerns are already showing up in the economic data.
Ordinary volatility is back. 2017 was quite an anomaly. It was a nirvana market. Now that we're back to normal volatility, it feels like, "Oh my god, something's wrong!" But no. It's just back to normal.
That said, a trade war, or the imposition of tariffs, does nothing but increase prices for consumers and producers alike on both sides of the issue. There is no winner in a trade war. So if costs increase for the companies in the S&P 500, and they're not necessarily able to pass those price increases to their consumers, that means earnings for the S&P will go down. It's not going to be good for the stock market.
You can reach Lara Crigger at [email protected]