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Tariffs, a Weak Jobs Report, and Expected Rate Hikes

The week was a see-saw of emotions related to a potential trade war with China. Stocks dropped Monday on fears of new tariffs, then rallied for three days as officials toned down rhetoric. On Thursday evening, President Trump suggested a review on more tariffs impacting about $100 billion worth of goods. China responded that it would fight protectionism to the end. That, along with a weaker than expected jobs report and Fed Chairman Powell reiterating expected rate hikes later in the year, pushed stocks down 2% on Friday.

Weekly Returns:

S&P 500: 2,604 (-1.2%)
FTSE All-World ex-US: (-0.9%)
US 10 Year Treasury Yield: 2.77% (+0.03%)
Gold: $1,333 (+0.3%)
EUR/USD: $1.228 (-0.2%)

Major Events:

  • Monday – The EPA moved to ease vehicle emission standards.
  • Tuesday – The Trump administration threatened tariffs on about $50 billion of Chinese imports.
  • Tuesday – Spotify completed a successful IPO, leaving it with a $26 billion valuation at the end of trading. The company opted for a direct listing, avoiding investment bank underwriters.
  • Wednesday – Facebook CEO Mark Zuckerberg said it was a mistake not to focus more on potential misuse of data and said the data from as many as 87 million users may have been improperly shared.
  • Wednesday – JM Smucker announced it will buy pet food company Ainsworth Pet Nutrition for $1.7 billion and look to sell its baking business, which includes Pillsbury.
  • Wednesday – The median price of a house sold in San Francisco in the first quarter was $1.6 million, up 24% from a year ago.
  • Thursday – The owner of the NYSE agreed to buy the Chicago Stock Exchange
  • Friday – U.S. stocks sell off on concerns about trade war despite efforts by administration officials to allay concerns.
  • Friday – In prepared comments, Fed Chairman Powell said the outlook for inflation and employment support further gradual rate hikes.
  • Friday – The US added 103,000 jobs in March, less than expected. Wages rose 2.7% and the official unemployment rate stayed at 4.1%.

Our take:

Last year, the S&P 500 moved more than 1% on just nine days and didn’t have a 2% day. In the last 11 trading days, we’ve had nine 1% moves and five 2% moves. So, yes, volatility has returned. What’s normal? Somewhere in the middle. Interestingly, despite the big daily moves, the ups and downs have mostly cancelled each other out and US stocks are down only about 2% for the year.

This week, the market was focused on the possibility of a trade war with China. President Trump called for evaluation of more tariffs and made strong statements while his officials tried to soften the tone and calm markets. Most of the tariffs being discussed are only proposed and there is still time to negotiate, but market reaction is reflecting the uncertainty involved. Only time will tell, but both sides seem to realize severe escalation would be harmful to growth and so we think it is most likely this story will end up yet another geopolitical risk that is relatively quickly forgotten.

Safer assets such as bonds and the often overlooked utilities sector held up well for the week, serving as a reminder of the long term benefits of diversification not just at the asset class level but among sectors and styles as well. Predicting corporate earnings is hard, predicting political decision making is harder still. That is exactly reason why we recommend avoiding market timing. Despite the negative week, it was telling that the market seemed to want to go up when there was no bad news.

Friday’s jobs report was softer than expected but this data series tends to be choppy and a rolling average is more informative. This month balances out February’s higher than expected results and the overall picture continues to paint a picture of a strong economy.

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