Trade issues may continue to cause trouble but shouldn’t derail the bull market or end the economic expansion.
Investor sentiment was mixed last week. Negatives included concerns about market liquidity, sparked by the rising value of the U.S. dollar and fears of contagion from some emerging markets. Ongoing trade issues also posed a general concern, particularly fears surrounding a potential new round of U.S./Chinese tariffs. On the positive side, investors focused on strong U.S. economic data that pointed to accelerating growth. The negatives won in the end, as the S&P 500 Index fell 1% for the week, after rising during eight of the nine previous trading weeks.
Liquidity Concerns Appear Overstated
Some investors are growing more concerned about shrinking liquidity as the Federal Reserve raises rates and shrinks its balance sheet, the value of the dollar climbs and select emerging markets such as Turkey and Argentina experience currency crises. Of all of these factors, we are most concerned about the rising dollar. The increase is not overly problematic by itself, but we would be more worried if interest rates were higher and rising more quickly and/or if economic growth were decelerating.
On balance, we recognize that market liquidity is growing more constrained and the current economic cycle and equity bull market are in their later stages. But we believe such concerns are overwrought. The global banking system remains healthy and global monetary policy is still relatively easy, which suggests that a liquidity squeeze isn’t in the cards.[+] Read More