LPL Financial Market Signals Podcast

The Currency Battle in the Trade War l LPL Market Signals Podcast

LPL Research

The Federal Reserve’s unofficial mandate is currency, and the pressure President Trump is putting on the Fed to cut rates is tied to the China currency situation. It’s a currency war as much as it is a trade war.

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Market volatility

The equity markets were weighed down last week by currency-related trade uncertainty after China retaliated against new tariffs by devaluing the yuan. Despite last week’s market volatility, the peak-to-trough decline in the S&P 500 Index so far this year has been just 7%. Drawdowns in the low-to-mid teens have been normal historically, even in years when the S&P 500 has been up.

Trade concerns

On trade, we continue to believe that self-interest could keep the United States and China talking, although both economies may have to endure more pain before meaningful progress can be made. President Trump may ratchet up the pressure on the Chinese ahead of the U.S. presidential election, and although President Xi is president for life in China, he is facing pressure as well.

The Fed is our friend

The Federal Reserve (Fed) is our friend. Stocks historically have done very well in the absence of recession after the Fed has begun to cut rates, with an average one-year gain of 16% following the initial rate cut.

We expect the S&P 500 to get some support from key technical levels 4–5% below August 9’s close at the 200-day moving average (2,794) and the June low (2,744), both shy of the 10% correction threshold.

Earnings season has generally been better than expected. Though only tracking to about flat year over year, significant drag from Boeing’s charge and a strong U.S. dollar indicate there’s stronger underlying earnings power, in our view.

Chart Summary:

Even in positive years, the average peak-to-trough decline in the S&P 500 Index has been 11% (based on data back to 1950). So far in 2019, the biggest drawdown has been 7%, based on closing prices.

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