After last evening announcing his choice for the Supreme Court, Judge Brett Kavanaugh, President Trump is flying this morning to Europe to discuss NATO (North Atlantic Treaty Organization) obligations and strategies with our allies. His reception is expected to be “cool”, because he has put off some of Europe’s leaders with tough talk on NATO obligations and trade tariffs. Regardless of what you feel politically, President Trump negotiates from the “Art of the Deal” standpoint of beginning from an extreme position and then over time moving toward compromise. LPL Research believes Trump cares about the stock market, and they believe there is a limit to how far the President may take the trade battle if stocks were to drop. LPL Feels that the fact that stocks have generally hung in okay (The Dow 30 Industrial Average is currently trading at 24,927) despite harsh words out of Washington is a positive sign.
Staying on the stock market, Small Cap Stocks have been strong. The Russell 2000 Index bottomed for the calendar year on February 8, 2018, and it has gained more than 12% since then. Tax reform, trade policy and a potentially stronger U.S. Dollar are just a few of the reasons LPL Research thinks continued Small Cap strength may be the case.
The area that has shown weakness this year has been bonds. Spreads have widened since February across many sectors of fixed income like high yield and investment grade corporates, emerging market debt and others, but the differences in patterns in various asset classes indicate that those market segments most affected by potential protectionist trade policies have been hit the hardest by spread widening in fixed income in recent months.
Remember, no one wins in a trade war. China, as an example, and the United States each care about their respective self-interests. Shutting off trade channels between the countries would do significant economic damage to both and is in neither’s best interest. To put this in a little perspective, the amount of stimulus going into the U.S. economy from tax cuts and deficit spending dwarfs the value of the tariffs announced to date. So, LPL expects eventual compromise with China to preserve the upward economic and earnings growth trajectory in the U.S. They expect that fiscal tailwinds will be sufficient to offset any tariff related slowdowns. They expect tax policy changes, reduced regulation, and increased government spending to sustain the economic expansion with mild inflationary pressures in spite of any trade tensions that should arise. We hope you all enjoyed our Independence Day Holiday! – Mark
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Economic forecasts may not develop as predicted. Some of this research material has been prepared by LPL Financial. All indices are unmanaged and may not be invested into directly. Referenced material: LPL Research Weekly Market Commentary & LPL Research Weekly Economic Commentary, both dated June 25, 2018. Approved Tracking #:1-748678.