Personal income and spending in the US rose last week and consumer confidence measured by the Conference Board reached an 18 year high. Furthermore jobless claims data remained at a 5 decade low but all the headlines were about the trade war between the US and China. Vice President Pence is understood to be preparing an offensive on human rights and China have retaliated with an ‘unreliable entity list’ of foreign companies which could harm its interest and threatened to ban rare earth exports, a critical component of technology hardware. The announcement of new tariffs on Mexico last Friday caused the S&P500 to lose its important 200 day moving average support level; some two thirds of Mexican imports are related party trade between companies shifting component parts between their factories.
European markets suffered similar headwinds with Italy’s FTSE MIB losing close to 3% and the spread of its 10 year sovereign yields’ to German bunds rising to 2.95% on Friday after tensions with the EU over debt levels. In China, the Shanghai Composite ended the week 1.6% higher but nevertheless ended the month 6% lower under tariff pressures.
For some perspective, it is good to remember that there is on average a dip of 5% or more in the S&P500 about 3 times in any typical year. The short term picture is also favorable for a dip as our proprietary leading indicators (chart above) show a slowdown in growth and inflation in the near term, a call which we made at the start of the year.
In such a situation, defensive sectors like utilities outperform and higher beta lags. But from a longer term perspective, it generally represents an opportunity to add to high beta and hence reduce the book costs of holdings in portfolios.
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3 June 2019
Long Term Investors Maintain Allocation To Quality Stocks
Global Economic Growth Slows
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