The Summer season is upon us, complete with days at the lake or the beach and plenty of back-yard cookouts. And this Summer season is providing not only the sounds of sizzling burgers and dogs on the grill, but also the sizzling sounds of geopolitical sound-bites (or tweet-bites) and the seemly never-ending buffet of headline risk playing havoc on one’s investments.
We have written about this before, and May was no exception, as headlines and tweets that China and US trade negotiations were breaking down drove markets to negative monthly returns for the first time this year. In May US equity markets fell by almost 6%. The negative performance seemed overwhelmingly driven by negative headlines even as economic data—such as higher profit margins and continued consumer spending—continued to show a US economy that seems just fine.
Fast forward to June, and we see markets completely reverse, up + 7% at the time of this writing and once again setting new all-time highs. What gives? June’s economic data looks similar to May’s, which is largely positive. So, what drove the market reversal? As we stated earlier, we believe that it’s all about the “sizzle”. This time the meaty burgers and dogs, metaphorically speaking, of course, that twitter served up were headlines such as “Trade with China back on track” and “Fed ready to ease rates”. All decidedly positive and very good for investment.
It’s hard not to get caught up in the news cycle. And as a fellow industry colleague once said, “Why just react when you can overreact.” We think that kind of sums it up. We are obviously following very closely this hyperreactive news cycle. The challenge is to determine what is actually newsworthy and what is simply “newsy noise”.
We were recently at an investor conference were the keynote speaker was Frank Kelly, who is Managing Director and Head of Government and Public Affairs at DWS. He spoke specifically to this subject. His first slide opened with “Geopolitics have slammed into the markets a driving force in ways we have not seen in decades.” So, with that as our “sizzling headline”, here are some highlights from his talk. If you would like any additional information on any of the topics, please reach out to us.
Rarely Spoken about – US debt is expected to double relative to the economy over the next 30 years. China’s debt-to-GDP is also rising rapidly.
Trump and Democrats are split and don’t seem able to accomplish any legislation, especially once presidential debates start (next month!)
But Congress will have to deal with the debt ceiling this fall
expect debate and disagreement and more market volatility
Federal Reserve Chair, Jay Powell may not be an economist, but he understands global finance and economics from his years at the Treasury Department. He has a very savvy team around him, good relationships with other central bankers, and he is not shy about meeting with members of Congress. Good relations with law makers should protect him from the attacks of Trump. As an aside, Yellen apparently never met individually with members of Congress.
China is facing many challenges at home
A rapidly aging population
Too many single men
Trade tariffs that are really beginning to have an impact
China’s extraordinary “Belt and Road” initiative and efforts to expand its military are partly in response to these challenges.
Trump is being advised that he has the upper hand, and that he might force the Chinese leadership to open up more when under pressure
Others believe China’s leaders would rather reverse its expansionist plans and turn inward in order to stay in power.
Still too murky to tell are: the outcome of sanctions on Iran, Brexit, new leadership in Turkey, Russia and a European Union without Merkel’s leadership.
We believe those are real issues which certainly call for close attention. As always please reach out to us if you would like additional information on any of the above topics.