Market Recap: Trade War Fears, Fed Rate Hike & Weekly Market Performance

The U.S. Markets suffered the biggest weekly decline in more than two years related primarily to concerns over a trade war with China. The S&P 500 finished down 5.9%. The Fed hiked the Fed Funds rate by 0.25% to a target of 1.5%-1.75% and indicated a likelihood of two additional hikes this year.

Weekly Returns

S&P 500: 2,588 (-5.9%)
FTSE All-World ex-US: (-3.3%)
US 10 Year Treasury Yield: 2.81% (-0.3%)
Gold: $1,347 (+2.5%)
EUR/USD: $1.235 (+0.4%)

Major Events

• Monday – U.S. stocks plummet amid tech selloff
• Tuesday – FTC probing Facebook over data use by Cambridge Analytica
• Wednesday – Fed raises rates and signals faster pace in coming years
• Thursday – U.S. stocks sell off on concerns about trade war
• Friday – Dropbox jumps 40% in trading debut

Our Take

Stocks were hit by a combination of trade war tensions, Facebook controversy, and another Fed rate hike. Tech was the hardest hit sector; Facebook made headlines when it was learned that an academic researcher released data on 50 million users to a group working for the Trump campaign. Shares dropped 14% for the week and gave investors cause to reevaluate tech valuations in general. While operating results have been strong overall, more than half of technology’s 34% gain last year was driven by multiple expansion – or simply higher prices – as opposed to actual earnings growth. So, a blow to image or reputation could cause a continued sell-off in this sector even though the scandal will blow over.

Safer assets such as bonds and the often overlooked utilities sector held up well for the week, serving as a reminder of the long term benefits of diversification not just at the asset class level but among sectors and styles as well.

Trade wars sap productivity and encourage inflation. Both of these are bad for the economy and bad for stocks, but it is impossible to know if the current rhetoric truly escalates or not. What has actually been enacted so far is not significant to the global economy overall. China does violate intellectual property rules and treats some U.S. companies unfairly, so it is not unreasonable for the United States to push back, but doing so creates uncertainty to both economies.

Trying to predict corporate earnings is hard; predicting political decision making is harder still. That is exactly reason why we recommend avoiding market timing. Despite the negative week, the longer term trend of the market remains an upward pointing one. It is not time to panic, but this week should serve as a reminder of the risk of concentrated portfolios.