Despite very public comments to the contrary, investors are still extremely concerned about the fragile trade relationship between the USA and China. Despite positive comments at various press conferences, we have yet to see concrete news of an amicable arrangement between the two parties. As a consequence, markets have suffered a sell-off and there could be further bad news in the short to medium term.
Defence stocks in favour
It says everything when you realise that 10 out of 11 sectors in the S&P 500 index fell on Friday. The only sector to stay in positive territory was utilities where generous dividend payments offer a welcome degree of support. The Dow Jones, NASDAQ and S&P indexes are all showing a triple bottom graph pattern. In summary, the markets have tried to rally on three separate occasions only to return to their recent lows. Further weakness from this level could prove challenging with few obvious support levels in the short term.
Retail sector under pressure
Many investors believe that the US retail sector is the most exposed to any long-term trade tariff hikes. As a consequence, we have seen a significant sell-off of retail stocks such as Walmart and Target Corp. When you bear in mind the number of brand names which are imported from the Far East it is not difficult to see where these concerns come from. What many saw as sabre rattling in the early days could turn into a full-blown trade war. With no winners!
US employment
It was somewhat ironic that the announcement of an additional 155,000 new jobs in November was overlooked by markets and investors. While below the Labor Department’s recent estimate of 190,000 new jobs it is most certainly a continued step in the right direction. The US unemployment rate is relatively steady at around 3.7% with wage inflation registering 3.1% year-on-year. As we have touched on in recent articles, wage inflation tends to lag the economy but the most recent 3.1% annual increase is the highest since 2009.
The US economy is still moving in the right direction, trade concerns are holding back investors, but support may come from an unexpected source. The Federal Reserve seems to have been in constant dispute with Donald Trump since his inauguration. Only a few weeks ago the indications were that US interest rates would rise gradually over the next 2 to 3 years. These expectations have been superseded by a more cautious approach with the Fed suggesting that interest rates are “balanced”. This would appear to be code for no more interest rate rises in the short term.
Highly rated stocks under pressure
When we talk about highly rated stocks the majority tend to revolve around the technology sector. In times of great economic hope these are the shares that can to all intents and purposes lose contact with reality as they move higher and higher. On the downside, when markets receive a reality check it is very often the highly rated stocks which are hit first. Recently we have seen the likes of Google, Amazon and even Apple come under pressure for an array of different reasons. In all likelihood, these are the type of stocks which will bounce fairly quickly as and when the markets recover – whenever that may be.