C.J. Lawrence Weekly – The Uncertainty Meter is Pegged
Friday’s stock market price action was emblematic of the current headline driven market. Initially, investors took comfort from comments that Federal Reserve Chairman Powell made at a gathering of central Bankers in Jackson Hole, suggesting that the Fed was ready to take further action if needed. But gains were erased when China announced that it was levying new tariffs on $75 billion of U.S. goods. Not to be outdone, President Trump commented in a tweet that he would respond in kind on Friday afternoon, sending stock investors to the exits. After the U.S. market closed the U.S. President announced increased levels of tariffs on Chinese imports. Fears have been growing that the global economy could tilt towards recession if trade differences are not resolved. Friday’s trade barbs suggested that an agreement is not in the offing.
When uncertainty reigns, investors head for safety. A good measure of the safety quotient is a combination of U.S. Treasury Bond yields and the price of gold. Each has unique supply/demand characteristics but taken in combination paint a useful picture of global investor sentiment and outlook. Currently, the uncertainty meter looks pegged. In previous cycles, gold was often used as a hedge against inflation. But with little inflation in the global economy, gold’s rapid rise is more likely a reaction to global central bank monetary policies, fears of capital controls in China, and concerns about the fate of Hong Kong.
Few sectors were spared in last week’s price action. Information technology, and industrial stocks had mounted impressive advances up through Thursday but were knocked down into negative territory by Friday. Defensive sectors like Utilities, REITs and consumer staples held on to earlier gains, with only Utilities finishing in positive territory for the week. In most recent market sell-offs traders and investors have been selling first and asking questions later leading to meaningful declines in stocks that have limited or no exposure to trade. The S&P 500 Index declined 2.59% on Friday with 320 of the 500 stocks declining within 100 basis points of the Index. That seems to us like very concentrated performance for a large index that surely contains a disparate group of trade losers and winners. Uncertainty may be high, and trade related risks are growing, but they are also creating opportunities for investors to own stocks of excellent companies, with heavy domestic exposure, at more reasonable prices.