The U.S.-China trade salvo continued after the weekend with China retaliating for the planned September 1 U.S. tariffs on $300 billion in Chinese goods. China devalued its currency, with the Yuan falling to its lowest value in 11 years relative to the U.S. dollar. China’s state media announced that Chinese-related companies have discontinued purchases of U.S. agricultural goods. The S&P 500, a proxy for large U.S. stocks, lost nearly 3% on Monday after dropping 3% last week, its worst one-day drop since February 2018. The technology sector took the brunt of the losses as markets continued to price in the impact of potential U.S. tariffs and the potential escalation of punitive measures. Investors sought safe havens in major foreign currencies, such as the Euro and the Japanese Yen, high quality U.S. Treasuries and gold. The 10-year U.S. Treasury rate fell to 1.74%, its lowest level since November 2016, and gold prices rallied another 1.5%. The trade war’s back-and-forth will likely keep risky global assets under pressure until the conflict moderates and there is little sign of further escalation.
In addition to trade policy uncertainty, we remain concerned with the softening pace of domestic and non-U.S. economic growth. Trade uncertainties are likely amplifying these growth issues. At the current expected pace of interest rate cuts, easier global monetary policy is likely insufficient to arrest slowing global growth. The decline in stock prices is narrowing the “wedge” we have seen between prices, which have largely moved up except for the last three trading sessions, and economic fundamentals, which remain more challenged and have been for several quarters, albeit from a strong base. While we remain concerned about deterioration in growth and we believe recession risks are rising, our view is that the solid level of consumer health should be sufficient to avoid recession. Consumer confidence remains strong, consumer debt levels are in line and the labor market remains strong.
Our modestly positive economic view implies the current environment may be a potential investment opportunity rather than a risk to be eliminated. At this point, we do not anticipate cycle-ending economic weakness to emerge, but we do expect more market volatility given concerns about both trade policy and monetary policy. We are maintaining our current balanced risk assessment between stocks and bonds. However, we are readying investment opportunities should the scales tip out of balance to indicate attractive entry points into certain asset classes and strategies.
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Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.
Past performance is no guarantee of future results. Diversification and asset allocation do not guarantee returns or protect against losses. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).
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