The Trade War
Trade tensions with China escalated in August, dragging stocks lower for the month. President Trump surprised markets with additional tariffs and China responded by devaluing its currency and halting purchases of US agricultural goods by state owned enterprises. The conflict continues to be a long and bumpy road and will likely persist in some fashion for years to come. On balance, the month was a step backward in terms of reaching a resolution, though early in September the two sides agreed to schedule another round of talks, prompting a quick recovery of the August equity market declines.
Bonds usually cede the spotlight to stocks in the capital markets, but plummeting interest rates put them center stage this month. The ten year Treasury yield dropped from 2.02% to 1.50% as investors anticipated additional rate cuts and looked for safety amid higher than normal equity volatility. Overseas, the value of bonds with a negative yield hit an all-time high of $17 trillion, leading some to believe US rates are headed even lower. There is no way to know if ultra-low interest rates are a signal the economic expansion may be coming to an end, a reaction to overseas central bank policy, or simply an overreaction to the trade conflict.
We believe it is critical for investors to maintain a balanced view and consider both sides of the story. Low rates create uncertainty but also promote higher stock valuations. With equity dividend yields now higher than government bond yields in the US and much higher overseas, companies need only maintain current earnings to be very attractive. Meanwhile, falling rates are driving strong absolute returns in bonds and are helping diversified portfolios.