Stocks Top Out As China Trade Tensions Rise

/ Percension Wealth Advisors, LLC/

Hi everyone,

China and tariffs are dominating the headlines right now. Trade tensions between the U.S. and China are being blamed for the recent stock market decline. The two sides are apparently far apart on a deal. as President Trump announced more tariffs going into effect on Friday. And so, because tariffs are bad for commerce, it logically follows that stock prices would fall.

But is this actually the reason stocks have fallen in recent days?

Maybe. But I have another take, which doesn’t involve leaning on the news in hindsight to explain why the market behaved how it did.

Before I go further, let me say that I remain bullish. One bad week doesn’t change that. In regards to last week, it is not surprising that stocks pulled back from recent highs. This is quite common when prices approach previous highs. Take a look at the following chart of the S&P 500 index. After it eclipsed the previous high set back in Sept. 2018, notice the trouble the market has had holding onto those gains (horizontal blue line)…

(chart created via stockcharts.com)

It is not unusual for sellers to show up near previous highs like they are doing here. This can occur independently of a trade war. There is no way to know what motivates each investor to buy or sell. Since we do not attempt to guess as much, we certainly would not peg a market rise or fall to the odds of a trade deal being struck.

There is pretty clear resistance around the 2,925 level for the S&P 500. It might take a couple knocks on that door in order to blow it open to more meaningful highs that actually stick.

If prices slide further from here, we may reduce certain positions if we believe that more losses will ensue. We did this a bit last week, but are still looking to buy if stocks can find some footing. As such, we are sitting on a decent cash position in most accounts. This should be temporary, but I believe it is prudent in the short-term given last week’s move.

As always, if you have questions about where the market is at or want to discuss your portfolio risk to check that it is aligned with what best fits you, feel free to contact me directly.

In The Market...

The S&P 500 fell -2.0% last week. Let's look under the hood:

(price data via stockcharts.com)

The S&P index had its worst loss since early March, as every major stock sector was in the red. The bond market provided a nice hedge of sorts, as investor demand to migrate into bonds pushed bond prices higher.

We were a bit more active than normal last week. A couple of our stop-loss orders triggered, which means a portion of a position was sold when its price fell to a specified value. Meanwhile, we purchased a Semiconductor sector fund (XSD), as we believe it has the potential to rally after falling some -9% from its recent peak. This is the same fund we owned a number of weeks ago and had sold near the previous top. Given its pullback I think it once again looks appealing to own.

In Our Portfolios...

What's New With Us?

I am going to switch up this blog in the coming weeks. Instead of doing a written post I will instead post a brief video containing our weekly update, narrated by me. I think it may be a bit more engaging so I welcome your feedback when we make that change.

On a personal note, we enjoyed a nice Mother’s Day that included going to dinner at Anthony’s along the waterfront. Since the weather was so great I stained our new fence, which is nearly finished.

Have a great week!

Brian E Betz, CFP®
Principal

The Real Estate Reign Continues In Seattle

/ Percension Wealth Advisors, LLC/

First, it was the renewed fear of a trade war with China. Then there was fear that Italy would leave the European Union (EU) following political instability. Then there was fear of a different trade war following tariffs placed on Canada, Mexico and the EU.

All three of these major developments happened this past week, and yet, U.S. stocks moved higher. Another reminder that there are news events and then there is how investors act. The two behave independent of one another and this was another example of that.

Despite the weekly gain stocks didn't exactly hit the cover off the ball. Overall the market is still moving mostly sideways, but it is optimistic how resiliently most equity sectors have held up lately. More on this below.

Two solid economic reports were buried in the news. Unemployment improved even further in May, falling from 3.9% to 3.8%. I won't spend time discussing this, but will refer you to what I wrote last month about unemployment dropping to a 50-year low if you want to see some historical perspective.

The other encouraging report, especially for us West Coasters, was the latest Case-Shiller housing numbers. Home values gained nearly +1.0% nationwide in March, rising in all 20 of the major cities tracked. Homes have appreciated by an average of +6.5% over the past year.

Seattle housing lapped most of the field yet again. Seattle real estate gained +3% in March and +13% over the past year. Las Vegas, where prices have risen +12.4% annually, may be primed to knock Seattle off its perch in the coming months based on the momentum building there. San Francisco is still in the picture as well, where homes are up +11.3% year-over-year.

Here is a city-by-city look at the latest housing numbers:

There is a two-month lag to these Case-Shiller numbers, so I will be interested to see if housing remains as hot into the Summer. I sense they will level off a bit more, as interest rates have risen and made financing more expensive. Speaking based on the areas I observe around Seattle, there appear to be fewer homes for sale than in years past. While reduced inventory is nothing new, I have noticed that homes have not been selling as fast compared to previous Spring seasons. Perhaps that is limited to my neighborhood or perhaps I'm mistaken, but that is my sense.

In The Market...

The S&P 500 gained +0.6% this past week. Let's look under the hood:

(price data via stockcharts.com)

At the sector level you will notice that returns were fairly split. Energy prices bounced back following a horrible prior week. Technology surged and continues to be the most attractive stock sector on all time-frames we analyze. The trade war and European tensions may have taken a toll on Financials, which were the worst-performing sector as interest rates dropped. 

The S&P 500 gained +2.4% in May but remains -5.0% below its all-time high. So there is still work to be done. I have been saying for the past few months that I felt a Tech rally would be needed in order to spark an entire U.S. stock market rally. If this past week is any indication we might see that very soon.

For now though the broad market is stuck in neutral. I had speculated that stocks would move sideways for a while coming off the big drop in February and unfortunately they have. We continue to own the two sectors that appear superior to the rest -- Tech and Consumer Discretionary.

In Our Portfolios...

What's New With Us?

Joshua Baird officially joins the team on Monday. I am excited for his arrival and the many contributions that he will bring to our firm in the future.

Have a great weekend,

Brian E. Betz, CFP®
Principal

Are Trade War Fears A Ticking Time Bomb For The Market?

/ Percension Wealth Advisors, LLC/

Last week was anything but boring.

U.S. stocks fell nearly -6% as trade war fears swelled and the Federal Reserve ushered in a new chairman. The sell-off started following the decision by the Fed to raise short-term interest rates.

Interest rates rising: The Fed increased the Federal Funds rate from 1.50% to 1.75%. This is the target lending rate that banks use to borrow money from one another in short stints (emphasis on short-term). It is the sixth rate hike since the Fed started increasing them back in Dec. 2015.

This was the first Fed committee meeting led by new Chair Jerome Powell, who recently replaced Janet Yellen. I liked his communication style regarding Fed policy, as he was more direct and less academic than Yellen or her predecessor, Ben Bernanke. But it remains to be seen whether the Fed's current aggressive approach to raising rates is the wisest path. Powell indicated there will be three more interest rate hikes in 2018, which sounds unrealistic to me if the stock market remains volatile.

Trade war looming? Meanwhile, President Trump placed tariffs on certain Chinese imports as retaliation for what has been deemed intellectual property theft. This comes two weeks after he issued tariffs on steel and aluminum imports from certain countries. This has led to fears of a global trade war - particularly between the U.S. and China - the two largest economies by a wide margin. Here are the five biggest economies based on gross domestic product (per the International Monetary Fund):

  1. United States: $19.4 trillion GDP
  2. China - $11.9 trillion GDP
  3. Japan - $4.9 trillion GDP
  4. Germany - $3.7 trillion GDP
  5. France - $2.6 trillion GDP

(GDP = value of all goods and services produced annually)

Actual tariffs or smoke and mirrors? There is one detail worth pointing out... the tariffs on steel and aluminum won't actually go into effect on the countries that matter until May 1st. Also, the Chinese tariffs effectively have a two-week grace period while the Trump administration announces which Chinese exports will be affected. So a lot can, and likely will, change. Until the tariffs actually go into effect, I can't view this as much more than a power-play for trade negotiations or political purposes.

When Fed Chair Powell was asked about the impact of tariffs and a potential trade war, he seemed relatively unconcerned. Powell said that it would not impact current conditions but that some Fed members voiced concern about the future impact. Huh? That makes no sense, but then again, maybe he knows something we don't. Perhaps he does not expect the tariffs to happen. Nonetheless, the prospect of tariffs and trade wars would have widespread implications should they take hold.

In The Market...

The S&P 500 fell -5.9% this past week. Let's look under the hood:

(source: stockcharts.com)

There is not much to say about last week's sector performance, other than it was bad. As we would expect, growth sectors like Technology and Financials got hit much harder than the likes of Utilities. Last week looked very similar to the stretch in early February when U.S. stocks fell -10% in the matter of a 10 days. The overall market finds itself in a familiar spot, with the S&P 500 finishing at almost an identical low and sitting right above its 200-day moving average. Take a look:

(created in stockcharts.com)

Notice how similar the two points in time are. The 200-day moving average is a pivotal threshold today as it was in February. We want the S&P index to hold above that pink line. We figured it would be a bumpy ride, but if the S&P breaks below the 200-day moving average it would likely set off a wave of additional selling among investors.

Reasons for optimism: Stocks have fallen -7% in the past two weeks, but two weeks does not make a trend. Until that February price-low is broken, which coincidentally means falling below the 200-day moving average as well, benefit of the doubt goes to the bull market.

Reasons for concern: Some of the momentum indicators we use in tandem with price movements are weakening. Relative Strength, which is the smaller chart above the price chart above, has fallen back to 30.0 level that presents serious risk. Also, only half of the stock prices that comprise the S&P 500 index are above their respective 200-day moving average prices. It is the lowest ratio of companies trading above their 200-day averages since March 2016. As mentioned already, if that worsens much more the bottom could fall out pretty quickly.

In Our Portfolios...

In Financial Planning...

This may be a good time to remind everyone that situations like this present an opportunity to invest during a market dip, provided you have a long-term time horizon in mind. If you are of the mindset like I am, which is that the market will rise in the long run, then these situations offer a chance to do things such as:

  • Increase your 401k contribution
  • Invest excess savings
  • Make a lump-sum contribution into a 529 college savings plan
  • Max-out your IRA contribution for the year (if eligible)

You might have to sit through an uncomfortable period should the market decline further, but eventually it will pay off if 100+ years of market history provides any proof.

What's New With Us?

In light of the past few days, I spent much of the weekend digging into the market and prepping for the week ahead. That is, when I wasn't recovering from the food poisoning I got at an event we attended on Saturday. All better now though!

Have a great week,

Brian E Betz, CFP®
Principal