Market Minute - December 14, 2018
by Scott Rosenquist, CFA
Trade and Interest Rates
Financial market headlines continue to be dominated by two topics, tariffs and interest rates. There were notable events regarding both recently and I’d like to take a minute to discuss them.
Investors have zeroed in on anything related to tariffs and interest rates over the past few months and volatility has increased as financial markets digest the news.
The G20 summit in Argentina brought President Trump and Chinese President Xi together to discuss the ongoing trade dispute. The meeting resulted in a 90-day delay on the 25% tariff scheduled to take effect in January for 200 billion Chinese goods. While this is certainly a positive sign that the issue did not escalate, there are a lot of details that still need to be worked out regarding intellectual property and technology. These issues are complicated and involve more than just tariffs. Investors will be keeping a close eye on developments as negotiations take place.
Federal Reserve Chair Jay Powell gave a speech recently where he stated that interest rates remain “just below” the level that would be neutral for the economy. The neutral rate is the rate that would neither speed up or slow down the economy. This is a different tone then what we heard from him during a speech in October, where Powell thought interest rates were a long way from neutral. Equity markets reacted positively to the news and now wait for the Fed’s next meeting on December 19th. The market is anticipating another rate hike next week and will be focusing on the Fed’s updated projections for 2019.
We are monitoring the situation on both tariffs and interest rates and the potential investment implications. As the fiscal stimulus begins to fade going into next year, we are reducing our overweight to credit sensitive areas of the fixed income markets in favor of short-term high-quality areas where yields are becoming more attractive. The volatility in the market may persist as these issues continue to unfold making a diversified portfolio important to weather the bumps and focus on long term objectives.
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