The markets have rallied to a new high, coming off of a 7% decline in the month of May. Broadly speaking, we are seeing the continued trade tensions as the driving factor for much of our recent market volatility. Additionally, there is raised awareness towards the possibility of the Federal Reserve decreasing interest rates at some point in the future.
Over the last weekend in June, world leaders will meet in Osaka, Japan for the annual G20 (Group of Twenty) conference. The US – China trade war is expected to dominate discussions, though there will also be a private meeting between Japan’s Prime Minister, Shinzo Abe and President Trump to discuss the pending US—Japan trade agreement. In North American trade, the USMCA trade agreement was recently ratified by Mexico, leaving the US and Canada as the remaining unsigned parties.
The biggest question we had coming into the New Year was “will the weakness in the global economies drag the US down, or will the US stabilize the rest of the world with our economic strength?” For now, the latter theory has won out, thankfully. That said, the weakness in Europe and the lack of a deal between the US and China still poses a global economic threat. So, we are watching these themes unfold with a close eye.
In the short-term, we expect the renewed volatility to continue to whip-saw investors. But, if the strength in the US continues, we believe the final quarters of 2019 could continue a good year in the capital markets.
The recent market correction does not necessarily come as a surprise. The markets were off to a white-hot start in 2019 and markets do not go straight up. We continue to believe the markets will trade higher by the end of the year, but our recent pullback has been driven by many of the international undertones from our trade negotiations with other countries. Here is a brief overview with where we are:
Japan – We currently have a $58B trade deficit with Japan and, as such, President Trump pulled us out of the Trans-Pacific Partnership. A recent meeting between President Trump and Prime Minister Shinzo Abe of Japan went well. The US would prefer a deal done with Japan as the China trade situation looks dire. Look for an agreement to be set up in August.
Canada/Mexico – The US, Mexico and Canada have reached a new trade deal that will replace NAFTA. This is good news for all countries. The new deal has only been accepted. However, Canada is moving quickly to ratify the pact and Mexico should follow suit.
China – This is the one getting all the attention, and it should. China is the second largest economy in the world, and they have a $419B trade surplus with the US. President Trump is playing hardball with China as recent negotiations fell through, and many US tariffs jumped to 25%. There is another meeting set up in June between the two economic superpowers, and it would certainly help the market condition if some inroads were made. The last thing anyone can afford is a full-blown trade war.