View our latest viewpoint here or read below.
As the SP 500 index grew from 2700 on June 20th to 2940 September 21st, the US equities have also enjoyed a steady climb. The increase of more than 240 points represents 9% climb without much of a drawdown. Yet we believe this smooth sailing is masking lurking dangers. Ten-year Treasury yield, a benchmark for institutional investors, has flirted with 3%, and will probably test this level again. If the rate tops the 3% threshold, investment managers will have to reweight their portfolio and revalue their assets. This will no doubt put pressure on the equity markets.
Another headline risk is the potential of a trade war. The current administration has used tariffs or the threat of tariffs as an enforcement mechanism to curtail the US trade deficit. However, the true economic consequences have generally been ignored. Tariffs increase the price of imports for US households, making regular purchases more expensive. As a result, the Federal Reserve is mandated to put a lid on inflation and indirectly dampen the financial stimuli from the Trump tax cut.
In emerging markets, currencies are going through a massive devaluation. Citing one instance, due to a diplomatic standoff with the Trump administration, the Turkish lira is going through a devaluation and a large account deficit. Argentina is experiencing a similar currency depreciation, forcing the central bank to raise their interest rate to approximately 60% to defend its currency. Furthermore, Russia’s ruble has plunged due to US sanctions.
Overseas crises have been isolated, but might not remain that way. In our view, for the short term, tariffs, trade wars, hostile political rhetoric, and emerging market currencies’ depreciation could introduce volatility in the US equity markets. Nevertheless, it will be short lived, due to strong earnings, a robust job market, and financial stimulus from the Trump tax cut.