For the second time this month, U.S. equities sold off as the Trump administration announced sweeping tariffs that threaten global trade. Despite solid economic fundamentals, selling in certain sectors was widespread on the threat of a simmering trade war. Financials, a beneficiary of increasing interest rates, sold off the most. Industrials, specifically aircraft makers – in particular Boeing, got hit badly as the possibility of China switching aircraft orders to Airbus looms. Consumer goods, agriculture stocks and of course, Chinese ADRs all followed Financials and Industrials down. All told, this weeks action, wiped out all the gains of Jan and Feb and puts the S&P 500 index down ~3.2% year to date.
And now for the good news. The Federal Reserve raised interest rates Wednesday and forecast at least two more hikes for 2018, signaling growing confidence that U.S. tax cuts and government spending will boost the economy and inflation and lead to more aggressive future tightening. U.S. sales of existing homes rebounded in February after declining for the previous two months, a sign that many Americans are still looking to buy despite rising prices and a shrinking number of homes available on the market. And, demand for US factory goods in February rose to the highest level in eight months, pointing to increased capital spending.
Given the mixed picture, what is the best course of action for investors?
Future Wealth’s View
Investors who believed until recently that selloffs were very limited in duration, are now coming to the realization that markets seem less confident about its ability to shrug off political factors as well as single company stories like the one from Facebook this week. And unfortunately, the many beneficial consequences of pickup in global growth has been thwarted by the imposition of protectionist measures.
It is our view, at Future Wealth, that as long as global growth continues to rise in a sustainable way, sound fundamentals should help anchor the markets and accelerate the move toward stronger economic and corporate results. That said, it is clear that era of low volatility is distant dream and investors should expect the whipsawing of the markets to continue into the foreseeable future.
In bicycle races, every rider encounters a “moment of truth” which can go either way – rise off the saddle and grind up the last hill along with the leader of the race or drop off the pace and accept defeat. This was a week of reckoning in financial markets and investors would do well to take a deep breath and stay with the fundamentals on this nasty hill.