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The major US Equity indexes have suffered noteworthy losses since the outcome of recent trade negotiations between the US and China involved turbulent responses.  The news wires have been relentless in their analysis and reporting of the possible ramifications that could transpire from possible introductions of retaliatory tariffs from each side.  Most hardest hit of course is the Tech sector given major players that leverage manufacturing and supply chains out of China, but really the fallout will affect a major of US enterprises.  The question at this point is….is the weakness experienced by the major Stock indexes purely a function of the trade dispute?  We would argue that a majority is (e.g. 75%) but there is another variable to consider.

Some of the major factors that have driven Stocks prices to surge for 2019 and for years prior has been dominated by the level of US longer term interest rates.  The recent Fed turning from hawkish to neutral/dovish reignited Stocks to regain the highs set back in 2018 as global investors adopted “risk-on” strategies and corporations continue to borrow cheaply to buy back outstanding shares.  A complementary factor to low rates has been technical indicators of the major indexes that provide speculators and fund managers upside objectives for trading points of entry and exit.  This brings us to the other element that has provided a bit of weakness to US stock prices.

A recent major upside objective for the S&P500 was 2950.  This level was achieved about a week before any trade negotiations began.  Once the major technical indicator was hit, market players often take a breather and lighten up or liquidate more aggressive positions….hence a point of inflection for a bull scenario.  The point to make here is that attempting to equate tariffs to actual levels of stock prices is daunting to impossible given the number of unknowns in the equation.  Yes the trade fallout is the catalyst behind recent weakness but it appears the markets were ready to take a breather anyway.

For an update on our assessment of the Trade conflicts…reference our write-up on Jan.7, 2019.


Stephan Kudyba (MBA, PhD)                      THE MARKET DOCTOR


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