The Currency Battle in the Trade War l LPL Market Signals Podcast
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.
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.
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.
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.
Tune In Now
Listen to the entire podcast to get the LPL strategists’ views and insights on what you can expect in the markets and economy through the end of 2019. You can subscribe to Market Signals on iTunes, Google Play, or Spotify.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured. These products are not bank/credit union obligations and are not endorsed, recommended or guaranteed by any bank/credit union or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.
For Public Use — Tracking #: 1-882312