01 Jul C.J. Lawrence Weekly – The Wall of Worry is Painted Gold
The geopolitical backdrop is changing fast and the markets are taking note. This past weekend the US and China agreed to resume trade talks and the U.S. agreed to delay the next round of trade tariffs. In exchange, China has apparently agreed to purchase more U.S. agriculture products. The stock market reaction to the détente is expected to be positive. The market’s bullish response signifies how important global trade is to the global economy and to equity markets. The news that both parties are back at the table opens a relief valve of optimism that a comprehensive deal will be reached. Trade negotiations are expected to restart soon, but it is difficult to see a clear path forward if both parties stay true to their original tenets of a deal.
China has insisted that the U.S. not put Huawei in the business penalty box. The U.S. has agreed to temporarily allowed U.S. companies to sell to Huawei. But the current détente does not lift prohibitions on U.S. companies and agencies from buying Huawei equipment. Nor does it lift the categorization of Huawei as a national security threat. Nothing was mentioned over the weekend regarding forced technology transfers, the language around which was previously a sticking point with the Chinese, and the U.S. has not responded to another of China’s preconditions of no new tariffs on any goods. For sure, it is a net positive that both parties are back at the negotiating table and are in search of common ground. But the obstacles that upended the first round of negotiations look to be firmly in place necessitating one party to blink. Based on past behavioral patterns it does not appear that either party is ready to be the first.
Year to date, the S&P 500 has successfully climbed the proverbial wall of worry. Falling interest rates have greased the market skids allowing investors to overlook slowing corporate earnings growth and growing economic storm clouds. But outside the equity markets other risk barometers have been flashing warning signs. While lower rates support higher multiples on stock earnings, declining yields also suggest an increasingly pessimistic view of the direction of economic growth and inflation. Negative bond yields in major markets around the globe point to even greater risks overseas. Interestingly, gold prices have spiked even as inflation prospects dimmed. In addition to its role as an inflation hedge, the yellow metal is often viewed as a safety haven during periods of economic instability. Investors have also bid up the price of bitcoin and other crypto assets as global trade wars raise the specter of currency manipulation and curbs on capital flows. Of course, Facebook’s announcement that it is launching its own digital currency may have boosted the perceived legitimacy of other digital assets, helping to push prices higher, but the asset class’ move in conjunction with gold should not be ignored. Stocks may rally near term on trade optimism. But there is still much work to be done. In the meantime, an eye should be trained on bond yields, bitcoin, and gold for insights into underlying economic trends and global risks. The next wall of worry could be painted gold.